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El Salvador: trending down

Tuesday, May 15, 2012

Not long ago, El Salvador was a Central American success story, driven in part by a dynamic private sector, whose businesses expanded throughout the region. In recent years, however, the country’s economic scenario has turned bleak, characterized by weak growth and high levels of debt.

A major problem is that El Salvador has all but been ignored by foreign investors. Last year, the country received only $386 million in foreign direct investment, by far the lowest amount in the region, either in absolute terms, or on a per-person basis. Low-cost loans from multilateral agencies were expected to make good the shortfall. But now, even that solution is doubtful. As a result of El Salvador’s failure to hold its fiscal deficit at a maximum of 2.5 per cent of the country’s gross domestic product, the International Monetary Fund has suspended a loan of $790 million, which it had guaranteed under a stand-by arrangement. Last year, El Salvador’s deficit reached 4 percent.

The Fund says that "its decision is negative for the country, which is highly dependent on multilateral support, considering its weak growth outlook, high indebtedness and low inflows of foreign direct investment."

A recent poll showed president Mauricio Funes as being the most popular Central American leader.

But the favorable rating may not last long, in the face of economic results, which continue to be poor.

An indication of possible cracks in Funes’ popularity came last month, when Héctor Dada resigned as finance minister, because he disagreed with the president's economic policies.