NS4540 Winter Term 2018 El Salvador: Outlook 2018 Oxford Analytica,Cuba: Economic Woes to Mark Succession Preparation December 13, 2017

Overview I President Salvador Sanchez Ceren of the left-wing FMLN will face challenges of Legislative weakness Modest economic growth High crime The opposition Arena is expected to Gain ground in the March 2018 legislative election and Win back the presidency from the FMLN in February 2019 Fragmented legislature will continue to undermine political effectiveness in 2018-22 Tensions between the two political parties to continue

Overview II Economic growth will average 2.3% annually 2018-19 Supported by rising remittances and Soft oil prices These offset Fiscal constraints and Weak investment Cancellation by Trump administration of the Temporary Protected Status (TPS) scheme for over 200,000 Salvadorians will have impact on remittances Remittances should Grow at current pace 2018-19 but Decelerate thereafter

Forecast

Gridlock Political gridlock is a particular problem in the fiscal area. The public deficit has remained above 2.5% of GDP in recent years and public debt has increased steadily Part of the problem is the pension system that has increased the financial demands on the Salvadoran state significantly. At the same time, pension fund returns have been insufficient, partly due to ineffective investment rules. A fundamental reform of the pension system is urgently needed, but unlikely

Assessment I A number of factors account for El Salvador’s low growth prospects Migration and violence are nearly as high in Honduras as in El Salvador Political paralysis is also a problem in Guatemala and Costa Rica and Low competitiveness and fiscal shortcomings are a bottleneck in several countries None of these factors independently explains El Salvador’s poor growth performance It is the combination of all these problems that complicates matters for El Salvador

Assessment II Specifically High levels of migration together with dollarization have led to an overvalued exchange rate which Has reduced employment opportunities feeding Crime and violence while Political gridlock and the preferences of the economic elite make policy change particularly difficult If El Salvador is to move on from it low growth equilibrium it will require drastic measures such as The introduction of a new national currency The rapid expansion of research and development and The establishment of political dialogue on key areas, including pensions

Assessment III With all such possibilities highly unlikely in the short-to-medium term, the economy looks set to suffer for some time. Fiscal consolidation and market-friendly reforms alone cannot resolve the deep structural obstacles that hinder the economy.

Major Forecast Risks Firms face difficulties in hiring skilled workers Probability very high, impact very high intensity = 25 High deficits prevent the government from enacting pro-growth policies leading to further stagnation Probability high, impact very high, intensity = 20 Inadequate road network hampers business operations Probability high, impact high, intensity = 16 Investment fails to increase, hurting growth Falling levels of violence suffer a reverse Probability high, impact moderate, Intensity = 12 Risk intensity is product of probability and impact on a 25 point scale