Country Report El Salvador 1st Quarter 2015

Update Country Report El Salvador 03 Nov 2014

Trade performance decouples from US recovery

Despite a strengthening US economy, El Salvador's trade performance has been poor this year, with exports falling in year-on-year terms in each of the three quarters. In the crucial textiles sector, it appears that the country is losing market position to some of its Central American neighbours. This suggests that, in the absence of an effort to raise productivity and move into more value-added segments, the country will gradually lose out to its more competitive regional rivals.

In January-September export revenue fell by 4.6%, although the import bill also dropped by 2.9%, narrowing the trade gap for the first time in two years. This latest trade data confirms a downward trend despite improvements in the US economy (El Salvador's largest export destination). Hit by a combination of poor coffee output, depressed sales of non-traditional goods within the region and slackened demand for maquila products (local assembly for re-export), total sales had already fallen by 5.5% in the first half of 2014. That compares with a steady rise from US$4.5bn in 2010 to US$5.5bn in 2013.

Worrying stagnation of the non-traditional sector

On a sectoral basis, by the end of September 2014 traditional products (coffee, sugar, shrimp), continued their declining contribution to total exports, down from 9.5% a year ago to just 6%. Reflecting the impact of the Roya fungus on plantations, coffee export earnings are now 56% down on last year, with poor prospects for improved output into the next harvest. Meanwhile, sugar exports tumbled by 15% despite benefiting from quotas, and shrimp sales were down by 58% (although their contribution to total sales is very small).

More worrying, however, is the continuing poor performance of the non traditional products-mainly various types of textile garments, plastic accessories (boxes, bottles, covers) and paper products. Their share of total export revenue is currently around 74%, but sales grew by just 0.9% in January-September. This could be explained in part by the temporary closure of El Salvador's land borders with Honduras and Guatemala earlier in the year following a dispute with transport carriers that held up transfer and delivery around the region. Roughly half of non traditional produce is sold within Central America. By September these sales were down by 2.4%; however, in contrast, sales outside the region are still holding up, rising by 4.3% year on year in January-September, suggesting that long-term diversification of target markets could help. El Salvador is also struggling to increase its share of the US market for its maquila produce (total maquila exports fell by 7.9% in the year to September). According to figures from the US Office of Textiles and Apparel, although US imports of textile aggregations from the Dominican Republic-Central America Free-Trade Agreement (DR-CAFTA) trade area as a whole have risen this year, purchases from El Salvador and Honduras have dropped, while sales from Guatemala and Nicaragua have increased.

Falling imports not a good sign either

On the import side, the lower cost of imported fuel has meant that the purchase of intermediary goods fell by 6% year on year, while the farming sector spent 28% less on imported fertilisers, and imports of raw materials from the maquila sector were 5% lower year on year. Overall, there has been a 3% drop in spending on capital goods, with the retail sector's outlay 23% down on last year and industrial manufacturing down by 6.5%-signs of a lack of new investment spending. Consumer imports continued to rise, however, and were up by 1.6% as family remittances from abroad grew by 8%.

Overall, the fall in oil prices should help to buffer the trade balance from any significant deterioration, even in the event that exports were to fall further. Likewise, the milder year-on-year decline in exports during the third quarter compared with the first two quarters suggests some possible improvement going forwards. Nevertheless, the divergence between El Salvador's export sector and the US economy poses some key policy-making questions in the long run, particularly if the country's structurally weak growth and stagnant productivity make it lose further ground against its faster-growing neighbours.

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