El Salvador - GFDRR

IV. ECONOMIC IMPACT | 105
Details on the productive development and social protection strategy are expected to be announced
before the end of the year. The Government’s bet is that planned investment and social protection will
boost activity in 2010. Based on the above, it is expected that the NFPS deficit in 2010, including pensions,
will be around 4.4% of the GDP. In addition, it is expected that the NFPS’s total debt could reach 40% of
the GDP in the same period.
iii) Financial policy. As a response to greater risk aversion by El Salvador’s commercial banking system,
the granting of credit to the private sector decreased 5% in real terms. The banks took advantage
of available liquidity to reduce their external debt by nearly 50% and to improve their temporary
profile.
iv) Evolution of key variables. Economic activity. With regard to economic activity, first-quarter information
indicates a contraction in nearly all sectors of activity, with the exception of the agricultural and
livestock, financial establishment and government services sectors. The contraction with the greatest
economic impact has been observed in manufacturing and commercial activity, which reflects the
severe contraction in both external and internal demand. Despite this, high-frequency indicators point
to a moderation in the rate of decrease, and thus the GDP in 2009 may drop 2.5%.
With regard to expenditure components, the reduction with the greatest economic impact would be
that of private consumption, which has been affected by the 10% drop in the nominal value of remittances
and by the deterioration in employment conditions. As of August, the number of contributors to
the Salvadoran Institute of Social Security had been reduced by nearly 20,000 workers, equivalent to a
6.7% decrease. The sector most affected is construction, where the decrease in formal employment totals
nearly 30%.
In turn, a 14.5% drop in gross domestic investment is expected. In addition to the above-described
credit conditions, private investment was affected by the drastic reduction in flows of direct foreign investment
(DFI), which are estimated to have decreased from US$784 million in 2008 to only US$88 million
in 2009. It should be mentioned that there is growing interest on the part of Brazilian investors in taking
advantage of various opportunities stemming from the free-trade agreement signed by Central America,
the Dominican Republic and the United States, with a significant increase in flows of DFI in 2010.
v) Prices, wages and employment. Beginning in the third quarter of 2008, the reduction in international
prices of basic goods gave rise to a sharp slowdown in food and beverages and in transportation
in the Consumer Price Index. The result has been a reduction in interannual inflation, which in fact
has become negative since the third quarter of 2009. Although as of October cumulative inflation is
–0.7%, an upswing is expected in the final months of the year stemming from the comparison with
low price levels observed at the end of 2008. In principle, it is estimated that inflation in 2009 will be
around 1%.
vi) External sector. It is estimated that exports of goods will experience a reduction of approximately 15%.
Two-thirds correspond to the drop in assembly plant (maquila) exports, while one-third corresponds to
the contraction in nontraditional exports, since traditional exports remained at a level similar to that
observed in 2008.