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C O N F I D E N T I A L SECTION 01 OF 02 SAN SALVADOR 000067 
 
SIPDIS 
 
E.O. 12958: DECL: 2020/02/08 
TAGS: ECON EFIN SOCI PGOV ES
SUBJECT: El Salvador's Economy: A Glass Half-Empty 
 
REF: 09 SAN SALVADOR 1238; 09 SAN SALVADOR 642 
 
CLASSIFIED BY: Robert I. Blau, Charge d'Affaires; REASON: 1.4(D) 
 
¶1. (C) SUMMARY: After seven months in office, the GOES has 
struggled to articulate either a clear economic policy or a clear 
security policy to address the two issues of greatest concern to 
the public.  The GOES has few tools to use to prod the economy 
towards recovery, and the economy is heavily dependent on a US 
recovery.  The private sector, inherently suspicious of a left-wing 
government, has lost much of its historic access to the highest 
levels of government and, in the absence of clear policy, now 
speculates the worst about the GOES's motives.  While the Economic 
Cabinet has not made any major missteps or radical shifts from 
previous administration, its inaction is now hindering new 
investment and may, in fact, be prolonging the country's recession. 
End Summary. 
 
 
 
¶2. (SBU) 2009 marked El Salvador's worst economic performance since 
at least the end of its civil war.  After projecting no change in 
its GDP figures over the first six months of 2009, in December the 
GOES revised official projections downward to a 3.3% contraction of 
GDP for 2009.  In 2009, exports fell 16.5% and imports fell 25.6%. 
Remittances, which make up about 18% of El Salvador's economy, fell 
8.5%. 
 
 
 
¶3. (SBU) Both the GOES and private sector concur that El Salvador 
will remain in recession through the first half of 2010.  For the 
full year, however, the GOES revised its projection upwards to 1.0% 
GDP growth, while the World Bank projects 0.8% growth and Fitch 
Ratings projects 0.2% growth.  On the other hand, Claudio DeRosa, 
an economist and former advisor to (center-right) ARENA 
Presidential Candidate Rodrigo Avila, told Econoff he agrees the 
economy will improve, but still projects a contraction of -2.5% to 
-0.5% for 2010.  Given the first half of the year will be negative, 
he said, he cannot realistically see the economy growing fast 
enough in the last half to put the full year in positive territory. 
 
 
 
 
¶4. (SBU) Leading economists disagree on whether there are any 
"green shoots" in the Salvadoran economy.  In former Central Bank 
President Rafael Barraza's view, the maquila (textile and garment) 
sector will lead the recovery.  He pointed to a smaller decline in 
maquila imports as an indicator that orders may be picking up, and 
that new exports will follow.  DeRosa and economist Luis Membreno 
both dismissed this idea, however, arguing that the smaller decline 
was only due to comparisons with already weak 2008 numbers.  Major 
US garment companies Fruit of the Loom and HanesBrand have started 
rehiring laid off workers, however, and HanesBrand representative 
Edwin Zamora projects that Hanes will be the largest employer in 
the country by the end of 2010. 
 
 
 
¶5. (SBU) The Funes administration's most significant policy 
achievement was a tax reform passed in late December and 
implemented January 1 (reftel A).  The GOES originally projected 
$250 million in new revenue, but the GOES is revising the figure 
downward to $190 million, asserting that changes made by the 
National Assembly on behalf of business were responsible for the 
lower tax receipts.  Private sector representatives have complained 
about the complexity of the reform, and have noted that the GOES 
still has not explained how some of the taxes will be collected. 
 
 
 
¶6. (SBU) The GOES's fiscal constraints have limited its ability to 
engage in counter-cyclical fiscal policy.  Tax revenues fell 10.3% 
(preliminary) in 2009, driving up the budget deficit to 5.5%, with 
a 4.3% deficit projected for 2010.  The only "stimulus" in the GOES 
"anti-crisis plan,"  announced soon after the Funes Administration 
took office, was the purchase of school uniforms (reftel B), a 
program since derided both in the press and by the private sector 
as mismanaged and ineffective.  In a dollarized economy, the GOES 
is unable to use monetary policy to stimulate the economy. 
Minister of Economy Hector Dada has acknowledged to the press that 
a US economic recovery will be one of the main factors behind a 
Salvadoran recovery. 
 
SAN SALVAD 00000067  002 OF 002 
 
 
¶7. (C) The AmCham Executive Committee expressed concern to Charge 
and Emboffs that GOES Cabinet officials failed to coordinate with 
one another.  They further asserted that the GOES is not 
articulating clear policies, especially on security and investment, 
causing uncertainty amongst investors.  The AmCham also noted that 
the proliferation of new "secretaries" in the Presidency and the 
apparent power shift away from Ministers made it difficult to know 
who to approach on a particular issue.  Separately, Luis Membreno, 
who served as a member of the Funes transition team, told Econoff 
that he and other informal advisors had lost their access and that 
the GOES Economic Cabinet had become increasingly isolated.  He 
also described Alex Segovia, the President's Chief of Cabinet, as 
"missing in action" on shaping and articulating the 
administration's economic policy. 
 
 
 
¶8. (C) COMMENT: 2009 was certainly an economic annus horribilis for 
El Salvador, but most economists think the worst is likely over. 
The trade benefits associated with CAFTA-DR will help to accelerate 
El Salvador's recovery as U.S. growth picks up in 2010.  Growth in 
other Central American markets will also benefit El Salvador, but 
again, this growth will likely depend on the prospects for a robust 
U.S. recovery early in 2010.  The domestic private sector has 
continued its "wait-and-see" approach to the Funes Administration, 
holding off on significant new investment until the economic 
picture becomes clearer.  An additional negative factor is the 
rumbling from the hard-line FMLN that they will usher El Salvador 
into "21st Century Socialism."  The GOES has both a five-year plan 
and an export promotion policy under development, though their 
success in reducing uncertainty will depend not only on the quality 
of the policies themselves, but also on a clear and consistent 
articulation of those policies by the GOES's senior economic 
officials. 
McGEE