Country Report El Salvador 1st Quarter 2015

Update Country Report El Salvador 31 Dec 2014

GDP expands by 2% in third quarter

Event

GDP grew by 2% year on year in the third quarter of 2014, according to the Banco Central de Reserva (BCR, the Central Bank), following growth of 2% in the first half of the year.

Analysis

Compared with the same period a year ago, the economy is performing slightly better, although El Salvador is still lagging behind its Central American neighbours in terms of GDP growth. While the lower price of oil (the country is wholly dependent on imported oil for its energy needs) has helped reduce the overall import bill by almost 3% this year, export sales are still falling (down by 3.9%), in spite of improved growth in the US, El Salvador's main export market. This suggests that factors such as high crime and low private investment continue to hamper exporters' ability to expand output to take advantage of increased US demand. The 0.8% growth registered between January and September, according to the BCR's Indice de Volumen Actividad Económica (IVAE, the monthly activity index), also reflects a more sluggish pattern to overall output this year.

As in the second quarter, all sectors bar construction posted growth in June-September. Farming and fisheries expanded by 2.7% (against a 0.1% contraction a year ago). Industrial manufacturing and mining expanded by 2.3%, largely due to stronger demand for non-traditional industrial products outside Central America (with the exception of textiles). In contrast, exports from El Salvador's maquila (domestic-assembly) factories, which produce mainly textile items for the US market, are down 7.5% this year. The services sector continues to provide the main impetus for growth, although, in many areas, growth was lower or the same as a year earlier. Retail, restaurants and hotels expanded by 2.4% (similarly to a year ago), as family remittances from the US, which rose by 7% between January and November, continued to drive domestic consumer spending. The financial and insurance sectors grew by 3.6% (compared with 4.7% in the same period of 2013), while government services grew by 1.4% (down from last year's 3.2%).

Impact on the forecast

Given the third-quarter GDP results, we are likely to raise our current year-end growth estimate of 1.8% for 2014. Going forward, owing to the approaching elections in early 2015 and expected public-spending cuts, we retain our forecast for average GDP growth of just 2% in 2015-19.

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