VZCZCXRO5596
RR RUEHLMC
DE RUEHSN #0419/01 0981957
ZNR UUUUU ZZH
R 071957Z APR 08
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 9275
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC

UNCLAS SECTION 01 OF 02 SAN SALVADOR 000419 
 
SIPDIS 
 
STATE PASS USAID/LAC 
STATE ALSO PASS USTR 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/PKESHISHIAN/BARTHUR 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV ES
SUBJECT: El SALVADOR: ECONOMIC AND TRADE UPDATE APRIL 2008 
 
¶1. Summary. According to Central Bank of El Salvador figures, El 
Salvador achieved 4.7% GDP growth in 2007, driven by increases in 
agriculture, the financial sector, retail, and transportation, 
communications and storage. Inflation remained stable at 4.9%.  The 
current account deficit increased by 66% to $1.1 billion and 
remittances reached $3.7 billion. Driven by economic growth and 
continued fiscal reforms, tax revenues increased by 12% during 2007, 
and the fiscal deficit was reduced from 2.9 to 2% of GDP in 2007, 
while public debt fell to 38.8% of GDP.  While El Salvador hit its 
target range for growth in 2007, a combination of rising fuel 
prices, a slowing U.S. economy, and political uncertainty with the 
2009 elections suggest a less optimistic forecast for 2008.  End 
Summary. 
 
GROWTH & INFLATION 
------------------ 
 
¶2. According to Central Bank official figures, El Salvador's GDP 
grew at a rate of 4.7% during 2007. All sectors showed positive 
growth. The most dynamic sectors were agriculture (8.6%), the 
financial sector (5.4%), retail (5.3%), and transportation, 
communications and storage (5.1%).  Manufacturing increased by 3.8% 
and utilities by 2.4%. 
 
 
¶3. The annual inflation rate for 2007 was 4.9%, the same as 2006. 
For February 2008, the accumulated inflation rate was 1.9%, compared 
to 0.9% in February 2007.  Inflation in El Salvador's main regional 
trading partners is putting pressure on domestic food prices such as 
grains and vegetables.  Similarly, higher international prices are 
affecting domestic prices of corn flour and fertilizers.  As a 
result, in February 2008, food prices alone increased by 1.9%. 
 
BALANCE OF PAYMENTS & TRADE 
--------------------------- 
 
¶4. In 2007 the current account deficit increased by 66% to $1.12 
billion, with family remittances compensating for most of this 
negative balance in the current account.  As of December 2007, 
family remittances reached $3.695 billion.  The trade deficit grew 
by 15% to $4.1 billion.  Total exports increased by 7.4% to $4 
billion, while total imports grew by 13.1% to $8.7 billion. 
 
¶5. Non-traditional exports (which exclude coffee, sugar, shrimp and 
maquila exports) were the most dynamic, expanding by 15.2%. 
Maquila exports (primarily textiles) increased by only 1.3% and 
traditional exports (coffee, sugar, shrimp) decreased by 1.1%. 
Within non-traditional exports, goods exported to the Central 
American region represented 67% of the total and increased 16.5%. 
Non-traditional goods exported outside Central America increased by 
13%. 
 
¶6. In 2007, total exports to the U.S. increased 2.2% to $2 billion, 
while the U.S. share of total exports decreased from 53.4% to 50.8%. 
 (NOTE: This was primarily caused by a drop in ethyl alcohol exports 
in the last two months of the year, driven by low prices and a drop 
in production because of plant maintenance.)  Within Central 
America, exports to Guatemala grew 15.1%, exports to Honduras 
increased 10.1%, exports to Nicaragua grew 12.8%, and exports to 
Costa Rica increased 1.15%.  Central America accounted for 34% of 
total exports. 
 
¶7.  Total imports from the U.S. grew by 14% to $3.1 billion in 2007, 
and the U.S. share of total imports increased from 35.4 to 35.6%. 
Other important sources of imports after the U.S. are Mexico, 
Guatemala, China, Honduras, and Brazil. 
 
 
FOREIGN DIRECT INVESTMENT 
----------------------- 
 
¶8. The total Foreign Direct Investment (FDI) stock increased by 39% 
from $3.7 billion to $5.2 billion in 2007. The financial sector 
accounted for 80.7% of this increase ($1.2 billion). The maquila 
sector received 6.9% of the total ($100.6 million), while 4.6% 
($66.7 million) went to communications.  Panama accounted for 58.1% 
of total FDI ($841.2 million) (NOTE: Much of this can be attributed 
to Bancolumbia's acquisition of Banco Agricola, which was done 
through Bancolumbia's Panama subsidiary. END NOTE) followed by the 
United States at 34.5% ($499 million). Mexico invested $59.4 million 
and Costa Rica invested $34.1 million. 
 
DEBT AND TAXES 
-------------- 
 
¶9. Tax revenues increased by 12% to $2.498 billion in 2007 while the 
 
SAN SALVAD 00000419  002 OF 002 
 
 
tax burden grew from 13.8% of GDP to 14.2% of GDP in 2007.  Value 
Added Tax (VAT) revenues increased by 10% to $1.5 billion while 
income tax revenues grew by 18.4% to $969.6 million.  The fiscal 
deficit was reduced from 2.9% of GDP in 2006 to 2% of GDP in 2007. 
Public debt was also reduced from 39.7% of GDP to 38.8% of GDP in 
¶2007. For 2008, the Ministry of Finance forecast the tax burden to 
reach 14.6% of GDP and the fiscal deficit to be further reduced to 
1.9% of GDP. 
 
COMMENT 
------- 
 
¶10. El Salvador successfully reached government growth projections 
of 4.5 to 5.5 percent in 2007, and the inflation rate remained 
stable despite unfavorable external factors like higher oil and food 
prices.  For 2008, however, the combination of projected higher fuel 
and food prices, a U.S. economic slowdown, and political uncertainty 
with El Salvador's January and March 2009 legislative and 
presidential elections threaten growth prospects.  The Government 
has already cut its 2008 GDP estimate down to 4 to 5 percent, and 
some analysts, including the World Bank, are projecting growth of 
less than 4 percent.  END COMMENT. 
 
Glazer