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

2. 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
Tensions between the two political parties to continue

3. 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 but
Decelerate thereafter

4. Forecast

5. 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

6. 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

7. 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

8. 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.

9. 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