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Bleak Future for the Salvadorian Economy

Article Summary:

El Salvador’s economy is on a backward trend as numbers show its economic activity is on the backward slide from the gains posted September 2011. As a result, in July, Fitch Ratings revised down the debt rating of El Salvador from “stable” outlook to “negative.”

Photo Credit: Salvador

Original Article Text From El Salvador via Google Translate :

The Picture is Bleak for the Salvadoran Economy

The end of the first half of 2012, the Salvadoran economy shows no signs of improvement and, according to local analysts, it is quite difficult for the Gross Domestic Product (GDP) exceeds 1%.

The estimate of economists is based on the indicators of the Central Reserve Bank (BCR), which reveal a marked economic slowdown. For example, the Index of Economic Activity Volume (IVAE) in May 2012 grew only 2%, registering a slowdown for the eighth consecutive month.

The annual cycle of low IVAE suggests that the Salvadoran economy would grow between 0% or 1% in 2012, in line with recently expressed by Carlos Acevedo, president of the BCR, who sustained this position on the possibility that the crisis in the European Union (EU) steepens.

Unfortunately, the prospects of the European bloc are still critical, while economic indicators Salvadorans reveal a grim picture, as shown by what happened to exports, which from January to June 2012 totaled $ 2,672.7 million, reflecting a fall of 3.6% over the same period of 2011, when it reached $ 2.774 billion. According to BCR this is due to lower sales of l the country in sectors such as coffee and maquila.

Only the maquila has experienced a decline in exports of 7.6% as in the above period they totaled $ 556.5 million.

The economist Robert Rubio, believes that unless the economy takes a turn toward important bearing not currently manage to grow beyond 1%, which would be causing stagflation, ie a high stagflation.

In his view, the outlook is not encouraging, especially by the institutional crisis and uncertainty in the country because of political conflict that persists for the Supreme Court of Justice (CSJ).

The analyst believes that this situation would tend to get complicated if there is a rebound of the European crisis in the U.S. economy, and therefore, in El Salvador.

To make matters worse, natural phenomena has not lifted for the country, affected by a drought. If this situation persists, agriculture experts estimate that it would be losing more than 10% of the harvest of cereals such as maize, rice and beans.

The only sectors that are showing signs of growth are finance and insurance.

The bank say they have achieved the recovery of private sector credit, and that has succeeded in stimulating the economy.

However, the deposits tend to remain virtually stagnant, analysts said the climate of political uncertainty in the country, which in turn has moved away foreign investment and stagnant local.

On the fiscal side, the economist Claudio de Rosa, argues that if tax revenues are growing, but under budget, making it difficult to achieve the deficit target.

According to his data, in two years and 11 months, the current government administration the country has borrowed $ 2.880 million more, at a rate of $ 2.6 million a day, which reaches the highest debt in the economic history of El Salvador.

In June 2012, total public debt amounted to $ 13,267,000.

“All governments borrow. The problem is more debt than the Treasury is able to pay annually. It is also relevant to know what resources invested” borrowed “because they must build capacity to pay in the future” said Rose.

In this regard public debt, Rubio believes the situation is quite critical because due to mismanagement of public finances, the country has come to have serious cash flow problems.

“I understand that the government still has a hole in the budget set of around 400 million dollars, I mean, with all the loans granted and the estimated revenue,” he said.

The worst is still no sign of where to get that $ 400 million, has not materialized as the Stand By Arrangement with the International Monetary Fund (IMF).

“In addition to the difficulty of obtaining international credit, the lever has been using the government, in my view, are abusive in Treasury bills (Treasury bills), and will reach 700 million dollars,” explained .

The analyst said that if the country fails the short-term debt to long-term public finances, especially housing, will be in serious difficulties. “And we will hire trapped in debt to pay debt.”

“We are in a situation that has no economic or political output. And I think to straighten and put public finances on a path of growth will need to dismantle, distrust and uncertainty,” said Rubio.

Rose supports that thought, believing that the fiscal outlook is even bleaker for the difficult cash position (cash) of Central Government.

This imbalance is evident in the constant complaints from providers for late payments. The government has been unable to deliver on time resources to the institutions of government, which cause low budget execution results in lack of medicines in hospitals, difficulties in meeting payments to suppliers (up to 150 days), wages and safety showing serious social arrears (a violation of law).

On July 23, Fitch Ratings revised down the debt rating of El Salvador and went from “stable” outlook to “negative.”

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From El Salvador

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