Country Report El Salvador 1st Quarter 2015

Update Country Report El Salvador 08 Oct 2014

Proposed 2015 budget sees higher social spending

Event

The government presented its US$4.8bn budget for 2015 on September 29th, based on 2.6% GDP growth, 1.3% inflation and a 4% fiscal deficit.

Analysis

As expected, the first budget of the president, Salvador Sánchez Cerén, clearly reflects the ongoing social priorities of the left-wing ruling Frente Farabundo Martí para la Liberación Nacional (FMLN), with education, healthcare and public security all receiving extra funds. According to the draft under discussion in the legislature, education will get an additional US$29m, healthcare an extra US$28m, and justice and public security-including the Supreme Court-an additional US$66m. Public-sector investment will be allocated 3% more than last year. Part of these funds will go towards the government's US$88.2m commitments for the second phase of the US Millennium Challenge Corporation budgetary support programme-known in Spanish as Fomilenio II-recently approved by the US government.

With the approval of a new stand-by arrangement with the IMF still pending, the 2015 draft budget also contemplates cuts across six ministries, ranging from a maximum of 13% (affecting the Ministry of Agriculture's budget) to a minimum of 1% (affecting the Ministry of Defence's budget). The budget of the Fiscalía General de la República (the attorney-general's office) will be slashed by 2%. Although the details of the cuts are not yet known, Mr Sánchez Cerén has pledged a 5% reduction in administrative costs across the public sector; such a move could provoke stiff opposition from the FMLN's allies in public-sector unions.

In the past, governments have traditionally underspent their projected budgets owing to poor administration. However, reflecting an overall increase of 3% from last year's budget, the 2015 draft is based on an optimistic 2.6% GDP growth next year, which The Economist Intelligence Unit does not expect the government to achieve. It also projects a fiscal deficit of around 4% by the end of next year, which depends partly on growth levels, but also, importantly, on the government's ability to raise extra revenue via taxation. Almost 90% of the budget is set to be financed via taxes. The expected increase in global interest rates over the next 12 months will also increase El Salvador's debt servicing costs.

Impact on the forecast

Our forecast for a 3.2% deficit in 2015 will be raised in consideration of the new budget.

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Whilst every effort has been taken to verify the accuracy of this information, The Economist lntelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this information
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