VZCZCXRO9831
RR RUEHLMC
DE RUEHSN #1112/01 2671947
ZNR UUUUU ZZH
R 231947Z SEP 08
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC 0100
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 001112 
 
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 UPDATE 
 
Summary 
------- 
 
¶1.  According to the economic cabinet's mid-year report to the 
President, El Salvador's first quarter Gross Domestic Product (GDP) 
grew at 4.2%, but the annual growth projection has been cut to 4%. 
Through June, the annual inflation rate reached a record 12-year 
high of 9.6%. During the first half of the year, total exports 
increased by 18.9% while total imports grew by 18%.  Tax revenues 
also increased by 9.2%.  The first half of 2008 was better than 
expected for the Salvadoran economy, but external factors, including 
high food and oil prices, are likely to weaken GDP performance in 
the second half of the year.  While economic growth is slowing, the 
growth rate is still well above what El Salvador experienced over 
the last decade.  End summary. 
 
GROWTH PROJECTION LOWERED 
------------------------- 
 
¶2. According to the mid-year economic report to the President, the 
official economic annual growth projection has been lowered from 
4.5% to 4% for 2008. During 2007, the economy grew by 4.7%. 
According to the President of the Central Bank, Luz Maria de 
Portillo, the main factors hindering growth are higher petroleum 
prices and higher food prices.  The latest Central Bank official 
figures show that GDP grew at 4.2% quarter of 2008, similar to the 
rate reported for the first quarter of 2007.  Agriculture showed the 
highest growth at 6.1%. 
 
RECORD INFLATION 
----------------- 
 
¶3. The annual inflation rate for the first half of the year reached 
a record 12-year high of 9.6%, the highest level since August 1996. 
(Note.  Through August, the annual inflation rate rose to 9.9%.  End 
note.) Miguel Corleto, the General Director of the Statistics and 
Census Office, stated that higher oil and food prices are the main 
factors driving inflation up.  A Salvadoran newspaper poll in August 
2008 reported that 40.4% percent of families surveyed considered the 
cost of living to be their main problem, while 17.5% said poverty 
and 16.1% said unemployment. 
 
LABOR STILL GROWING 
------------------- 
 
¶4. The figures for private sector workers ascribed to the Salvadoran 
Social Security Institute (ISSS) reported a 4.3% rise in formal 
employment between January and May.  While this is a positive 
development, it is still lower than the last year's 8% growth for 
the same period.  Jobs increased for all sectors except 
construction, which dropped 2%. 
 
EXPORTS UP 
---------- 
 
¶5. Total exports increased by 18.9% between January and June 2008 to 
$2.3 billion. Non-traditional exports generated 47% of total exports 
and expanded by 37%.  Within non-traditional exports, goods exported 
to the Central American region represented 65% of the total. 
Traditional exports increased by 37% to $249.5 million because of 
the increased value of coffee exports.  Maquila (textile) exports 
grew by 12.5% to $956.4 million. 
 
¶6. Total imports grew by 18% during the same period.  Imports from 
outside of the region increased by 20.5%, while imports from the 
Central American region grew by 16.6%.  Family remittances increased 
by 6% to $2.3 billion, although, the remittance growth rate has 
slowed to 4.9% through August. 
 
 
FOREIGN DIRECT INVESTMENT 
------------------------- 
 
¶7.  The total Foreign Direct Investment (FDI) stock through March 
2008 totaled $5.2 million, a 0.7% increase over December 2007.  The 
industrial sector accounted for 28% of the FDI increase.  The 
financial sector accounted for 28% of total FDI in the first quarter 
of 2008, while the industrial and communications sectors each 
accounted for 17% and 16% of FDI in the first quarter was in the 
electricity sector. 
 
TAX REVENUES ON THE RISE 
------------------------ 
 
¶8.  Tax revenues increased by 9.2% to $1,686.1 million during the 
first half of 2008.  Value Added Tax (VAT) revenues increased by 
 
SAN SALVAD 00001112  002 OF 002 
 
 
11.5% to $833.1 million, while income tax revenues grew by 7.2% to 
$647.4 million.  The public debt was reduced from 37.2% of GDP to 
36.4% of GDP.  Public investment increased by 18.2% to $249.1 
million. 
 
¶9.  The government expects to further increase tax collection with a 
fiscal amnesty approved in June 2008.  With this amnesty, all tax 
taxpayers that have debts with the Ministry of Finance would have 
the corresponding interest and fines waived if they pay between July 
11 and December 19.  Minister of Finance William Handal expects the 
amnesty to draw between $20 and $25 million of about $80 million in 
outstanding tax debts.  Approximately 20,000 people took advantage 
of a similar 2004 amnesty.  For the 2009 budget, Minister Handal 
explained that tax revenues are expected to increase between 7 and 
9% to around $3.5 billion, $300 million more than the 2008 budget. 
The Saca Administration will present its proposed 2009 budget to the 
Legislative Assembly by the end of September. 
 
SUBSIDIES GROWING 
----------------- 
 
¶10. The cost of government subsidies continues to rise.  The 
electric energy subsidy grew by 140% to $79.6 million, the gas 
propane subsidy expenditures increased by 57% to $66.9 million, and 
the public transportation subsidy grew by 480% to $14.5 million. 
The cost of other social transfers also increased.  Expenditures for 
the anti-poverty program "Red Solidaria" grew from $4 million during 
the first semester of 2007 to $10.1 million in the first semester of 
¶2008.  In sum, the Central Bank expects the total amount of 
subsidies to rise to $700 million this year. 
 
COMMENT 
------- 
 
¶11.  Given world events, the Salvadoran economy enjoyed a better 
than expected first half of 2008, save for rising inflation.  The 
effects of high food and oil prices plus bank failures in the U.S. 
economy, however, are more likely to cause problems in the second 
half of the year.  Other analysts, including from the World Bank, 
have cut their growth estimates to 3.5% for the year.  Fiscal 
problems caused by rising subsidies are also likely to take their 
toll.  On the other hand, while economic growth is slowing, the 
growth rate is still well above what El Salvador experienced in the 
decade prior to the implementation of CAFTA in 2006. 
 
Blau