El Salvador

Politics:

• Analysis

  El Salvador politics: The year of living less dangerously

  El Salvador's gangs: The year of living less dangerously

  An unusual armistice has lasted longer than many predicted

  A YEAR ago El Salvador was second only to Honduras in the UN's global murder rankings. The first two months of 2012 brought nearly 14 killings a day--seven times more than in Britain, which has ten times El Salvador's 6.3m population. But last year the murder rate fell by more than half, when the country's two biggest maras (gangs) agreed on a truce. Against all expectations the ceasefire has held, and will complete its first year on March 9th.

  "Enough people have died. The prisons are full of youths and our families have suffered," says Carlos Mojica Lechuga, a slender 50-year-old reckoned to be the leader of the Barrio 18 mara. His handshake with Edson Zachary Eufemia, of the rival Mara Salvatrucha gang, was enough to persuade many of the gangs' 65,000 members to end hostilities. The daily death toll since then has been about six, around the Central American average.

  Despite the drop in violence, the truce is "very unpopular", admits Raúl Mijango, a former defence-ministry adviser. Together with a Catholic bishop, Mr Mijango brokered the ceasefire, at arm's length from the centre-left government of President Mauricio Funes. Gang leaders have been moved to lower-security prisons, to let them communicate with their troops but perhaps also as a sweetener. Mr Mojica, who was jailed in 2003 for decapitating a teenage girl who dated a member of the Salvatrucha, was transferred from Zacatecoluca (known as "Zacatraz" for its awful conditions) to a slightly less squalid jail in Cojutepeque, where he meets visitors in brand-new Reeboks and a personalised "18" baseball cap. He sports the all-body tattoos that are the mara trademark.

  The public also complain that extortion, a way of life for the maras, has continued untamed. David Munguía, the security minister, says that robberies have fallen by about a tenth and extortion by a fifth since the truce. "We are still punishing crime, but leaving doors open," he says. Last year saw an increase in arrests, as well as the setting up of a 500-officer anti-gang police unit, he adds.

  Since January five towns have been designated as "peace zones", where the local maras have pledged to end not only murders but extortion. In return the government has promised jobs.

  "Violence is high, but unemployment is higher," says Salvador Ruano, the mayor of Ilopango, a peace zone on the eastern fringe of San Salvador, the capital. He says the youths who extort $5-10 a day from local shops want "a legal way to bring home the frijoles (beans)". Ilopango has set up a bakery and chicken farm for former gangsters, paid for with about $50,000 of municipal funds. Mr Funes's government has promised $72m for 18 peace zones; at least 40 mayors have expressed an interest.

  Subsidising jobs for gangsters is a hard sell politically in a country with a tradition of "iron fist" policies against crime, and where income per head is just $4,000 a year. The peace zones were initially christened "sanctuaries" but hastily renamed after residents imagined a haven for criminals. With a presidential election a year away, all parties want to appear tough on crime. But the interest in the peace zones among opposition mayors such as Mr Ruano suggests the truce may last. It has already saved some 2,000 lives--rare good news in a violent region.

  March 09, 2013

• Background

  El Salvador: Key figures

  Mauricio Funes

  Mr Funes of the Frente Farabundo Martí para la Liberación Nacional (FMLN) became El Salvador's first left-wing president on June 1st 2009, after beating the Alianza Republicana Nacionalista (Arena) candidate, Rodrigo Ávila, by 51% to 49% in the March election. Politically, Mr Funes is a moderate, aspiring to emulate the left-wing government of Brazil's former president, Luiz Inácio Lula da Silva (2003-11). Despite failing to tackle many of the endemic problems of crime and unemployment, his willingness to break with the FMLN's ideological rigidity, by supporting dollarisation and the Dominican Republic-Central America Free-Trade Agreement (DR-CAFTA) with the US, has helped to build a strong public persona. He is constitutionally barred from standing again in 2014.

  Salvador Sanchez Cerén

  Recently designated as the FMLN's virtual presidential candidate for 2012, Mr Sánchez Cerén is the current vice-president and minister of education-both positions that he expects to step down from later in the year, in order to focus on his campaign. Unlike the more moderate Mr Funes, Mr Sánchez Cerén is a member of the hardline faction that controls the leadership of the FMLN. Known as "Leonel González" during the civil war, he was one of five members of the guerrillas' political and military general command. He is the highest-ranking member of the former guerrilla forces to have retained a leading post in the party.

  Alfredo Cristiani

  One of Arena's most successful and popular presidents, Mr Cristiani (1989-94), was reappointed head of the party's national executive committee following Arena's election defeat in March 2009. His task was initially to restore party unity, but he has been blamed for Arena's most serious split since its creation-when 12 legislators out of 32 defected and formed the Gran Alianza Nacional (GANA) party in 2009. Nevertheless, the party's recovery in the legislature during the 2012 election could make up for his earlier difficulties as a party leader.

  Norman Quijano González

  Mr Quijano of Arena was elected mayor of the capital, San Salvador, in January 2009, ending 12 years of FMLN rule in the city. A dentist by profession, he became a deputy for Arena in 1994, rising in 2006 to secretary of the legislature's Junta Directiva. His victory in the mayoral race has been largely attributed to his successful house-to-house campaigning style, and his ongoing success led to his re-election in the March 2012 municipal election. This could boost his already strong position for the party's presidential bid in 2014.

  August 23, 2012

• Structure

  El Salvador: Political structure

  Official name

  Republic of El Salvador

  Form of state

  Unitary republic

  Legal system

  US-style Supreme Court system

  National legislature

  Unicameral Legislative Assembly, comprising 64 locally and 20 nationally elected deputies, elected every three years

  Electoral system

  Universal adult suffrage

  Next elections due in March 2014 (presidential)

  Head of state

  President elected for a single term of five years

  National government

  The president, Mauricio Funes, governs with the support of the FMLN, which holds 31 of 84 seats in the legislature; he appoints and presides over a Council of Ministers

  Main political organisations

  Government: left-wing Frente Farabundo Martí para la Liberación Nacional (FMLN) governs in alliance with the Gran Alianza de Unidad Nacional (GANA) and Conciliación Nacional (CN)

  Opposition: right-wing Alianza Republicana Nacionalista (Arena); Partido Demócrata Cristiano (PDC); Cambio Democrático (CD)

  President: Carlos Mauricio Funes Cartagena

  Vice-president: Salvador Sánchez Ceren

  Key ministers

  Agriculture: Guillermo López Suárez

  Defence: José Atilio Benítez

  Economy: Hector Dada Hirezi

  Education: Salvador Sánchez Ceren

  Environment: Hernan Rosa Chávez

  Finance: Carlos Cáceres

  Foreign relations: Hugo Martínez Bonilla

  Health: María Isabel Rodríguez

  Interior: Ernesto Zelayandía

  Labour & social security: Humberto Centeno

  Public security & justice: David Munguía Payés

  Public works: Gerson Martínez

  Tourism: Jose Napoleón Duarte

  Central Bank president

  Carlos Gerardo Acevedo Flores

  January 04, 2013

• Outlook

  El Salvador: Key developments

  Outlook for 2013-17

  • Despite slow progress on tackling poverty and unemployment and still-high levels of violent crime, the president, Mauricio Funes, will remain popular until the end of his term in 2014.
  • A constitutional crisis that put the Supreme Court in direct conflict with the legislature was resolved in August, but rifts between the three branches of government will continue throughout the forecast period.
  • GDP growth will be modest in 2013-17, averaging only 2.5%, as a gradual pick-up in private consumption and continued export growth is offset by a very weak investment environment and a fragile domestic production base.
  • Although Mr Funes will struggle to put in place fiscal consolidation measures, we expect the government to remain committed to its three-year stand-by arrangement with the IMF, which guarantees macroeconomic stability.
  • Inflation will remain moderate, at an average of 3.4% in 2013-17, as domestic demand recovers only slowly, but continued dependency on costly imported food and oil will exert upward pressure on the consumer price index.
  • Despite a moderate strengthening of the real effective exchange rate in 2013-17, the dollarisation policy adopted in 2001 will not come under threat in the outlook period, reflecting its broad acceptance across the political spectrum.
  • From a post-crisis high of 5.4% of GDP in 2011, the current-account deficit will narrow to 3.7% of GDP by 2017, reflecting higher exports owing to DR-CAFTA as well as efforts by the government to lower import costs.

  Review

  • Having previously announced Sánchez Cerén as its candidate, the ruling party has chosen a moderate, Oscar Ortiz, as his running mate.
  • Street gang leaders proposed an expansion of a truce as they offered to disarm and end extortions in special safe zones, but the long-term viability of the truce is still questionable despite the fall in the murder rate.
  • Concerns are growing over the economy's chronic weakness, as monthly economic activity and industrial production indicators for the first three quarters of 2012 point to yet another year of growth of under 2%.
  • The Salvadoran government has returned to the international bond market for the first time since 2009 with a successful US$800m eurobond issue in late November, which was oversubscribed four times.
  • Revenue raising measures coupled with low wage and administrative spending bring improvement to the fiscal deficit, which reached 2% of GDP in September. However, it is still likely to overshoot the IMF target.

  January 04, 2013

Economy:

• Background

  El Salvador: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	6.2	Population growth	0.5
  GDP (US$ m; market exchange rate)	22,502.9	Real GDP growth	0.9
  GDP (US$ m; purchasing power parity)	40,933	Real domestic demand growth	0.1
  GDP per head (US$; market exchange rate)	3,612	Inflation	3.7
  GDP per head (US$; purchasing power parity)	6,570	Current-account balance (% of GDP)	-4.7
  Exchange rate (av) :US$	1.00	FDI inflows (% of GDP)	3.1
  a Actual.

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  Background: El Salvador was ruled by a succession of military governments from 1930 until 1979. The suppression of basic political freedoms and the unequal distribution of land and wealth led to increased protests and the formation of a Marxist guerrilla movement in the late 1970s, and eventually to the outbreak of a full-scale civil war in 1980. The civil war ended with a UN-sponsored peace deal in 1992, leading to the first multiparty democratic elections two years later. Between 1989 and 2009 the presidency was in the hands of the right-wing Alianza Republicana Nacionalista (Arena). A moderate, Mauricio Funes, supported by a former leftist rebel group, the Frente Farabundo Martí para la Liberación Nacional (FMLN), assumed the presidency in June 2009. Mr Funes heads the first left-wing government in El Salvador's history.

  Political structure: The political system is presidential, with an 84-seat unicameral legislature elected every three years. The president is elected for a term of five years. At present, legislators and town councils are elected for a term of three years. The Tribunal Supremo Electoral (TSE, the electoral tribunal), which oversees all elections, is a pluralistic body with equal representation from the main political parties. There have been proposals to enfranchise the 2.5m Salvadorans living abroad.

  Policy issues: Dollarisation introduced in 2001 has brought down inflation and interest rates, but has also exposed the need to address the economy's underlying lack of competitiveness. More microeconomic and institutional reform is needed to address the deficiencies of the business environment, including costly utilities, low skills levels and a lack of affordable financing. Further fiscal reform will be central to consolidating macroeconomic stability, reducing the public debt burden and ensuring that the country can respond efficiently to exogenous shocks in the absence of control over monetary policy. The Funes administration has shifted policy towards the left, associating with the moderate Latin American left, and will maintain relatively sound macroeconomic management.

  Taxation: Tax on corporate income is levied at 30% for earnings above the first US$150,000. From 2012, dividends are subject to a tax rate of 5%. All residents are subject to a progressive income tax on a scale from 10% to 30%. Value-added tax (VAT), introduced in 1992 at 10%, was raised to 13% in 2003. Food produce and medicines are exempt from VAT.

  Foreign trade: The Dominican Republic-Central America Free-Trade Agreement (DR-CAFTA) introduced a tax-free regime for trade with the US, El Salvador's largest trading partner, with immediate effect on most products. A similar deal with the EU has also recently been ratified. High commodity prices in 2011 boosted export earnings, which rose to US$5.4bn in 2011, while import spending (cif) increased by 19.1% to US$10.1bn.

  Major exports 2011	% of total	Major imports 2011	% of total
  Non-traditional	65.0	Intermediate goods	44.3
  Maquila	22.2	Consumer goods	34.5
  Coffee	8.6	Capital goods	12.7
  Sugar	2.5	Maquila	8.4
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  US	45.7	US	37.8
  Guatemala	13.9	Guatemala	9.8
  Honduras	13.2	Mexico	7.6
  Costa Rica	4.0	Ecuador	2.5

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  January 04, 2013

• Structure

  El Salvador: Economic structure

  Data and charts: Annual trends charts

  
  

  

  January 04, 2013

• Outlook

  El Salvador: Country outlook

  El Salvador: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The political situation has normalised following the resolution of a constitutional crisis in August which had pitted the National Assembly and the government of the president, Mauricio Funes of the Frente Farabundo Martí para la Liberación Nacional (FMLN), against the Supreme Court over the appointment of judges to the latter. Both the FMLN and the right-wing Alianza Republicana Nacionalista (Arena) have now moved on to an electoral footing, having selected their candidates for the 2014 presidential election in recent months. Although the pre-election period raises the risk of greater political tensions between the two main rival parties, there has been co-operation on certain key items on the agenda, most recently allowing the government to issue US$800 in eurobonds in order to cover debt due in early 2013. However, tension could still arise over the adoption of some of the more disputed elements of Mr Funes's agenda-such as increased social spending on healthcare, education and rural programmes-which would entail higher spending commitments at a time when the fiscal outlook remains fragile. Moreover, disruptive protests or strikes remain likely, reflecting the economy's continuous weak performance since the 2009 recession, high levels of unemployment, persistent corruption and political interference in the judicial system, as has been evident over the past few months. Overall, however, the Economist Intelligence Unit expects the president's pragmatic approach and popularity to allow him to avoid major frictions within his own party, although he may be increasingly sidelined as the election approaches. Mr Funes's centrist stance will also prevent any drastic policy shifts, reassuring voters and external donors.

  ELECTION WATCH: The legislative and municipal elections held in March 2012 resulted in the opposition Arena claiming 33 out of 84 seats in the 2012-15 Legislative Assembly, two more than the ruling FMLN. Given that neither the FMLN nor Arena will enjoy a legislative majority, both parties will seek to consolidate their positions by forming ad hoc alliances with smaller parties, in particular with the right-wing Gran Alianza de Unidad Nacional (GANA), which has now become the country's third most important legislative force and a potential power broker, with 11 seats. Despite its losses at the recent mid-terms, the FMLN will attempt to build a strong base ahead of the presidential election scheduled for March 2014. In late June, the party's leadership designated Salvador Sánchez Cerén, the current vice-president, as its presidential candidate, hoping to appeal to its core supporters. In order to reach out to more centrist voters, however, the moderate Oscar Ortiz was chosen as his running mate. At the same time, Arena selected Norman Quijano, the current mayor of San Salvador, as its own candidate.

  INTERNATIONAL RELATIONS: Mr Funes's foreign policy will prioritise maintaining close relations with other Central American countries and the US, El Salvador's most important trade and investment partner and home to over 2.3m Salvadorans. In addition to trade and immigration, bilateral relations with the US will focus on increased co-operation on security matters and are likely to involve greater support for the Funes administration's development programmes from the US. Although the FMLN maintains historical links with radical leftist regimes in the region (including with Venezuela's president, Hugo Chávez, and with the Castro brothers in Cuba), the government and the ruling party will avoid taking a marked anti-US stance. Instead, Mr Funes will seek to develop closer political and economic ties with moderate governments in Latin America and increase trade links with Asia and Europe. In the latter case, this has been boosted by an association agreement-which includes a free-trade component-signed in June. Co-operation with other Central American governments on security-related issues will also be a priority, and will include discussions over the decriminalisation of drug use (and possibly partial legalisation).

  POLICY TRENDS: Volatile external conditions and structural weaknesses will complicate the government's main policymaking priorities, which include jump-starting sluggish GDP growth (which averaged 0.2% in 2008-11) and investment, as well as meeting the fiscal targets and structural reform criteria under the IMF's three-year US$790m stand-by arrangement, which expires in March 2013. Meeting the stand-by arrangement's targets will prove particularly difficult in the short term, particularly on fiscal matters. However, even after the December 2011 approval of a tax reform that will bring an extra US$150m (0.7% of GDP) in revenue, the government will need to make some efforts at consolidation in the medium term, as serious fiscal slippage would cause IMF support to waver, jeopardising its fiscal and financing programmes. Adherence to the stand-by arrangement is important, as it provides a cushion against external volatility and facilitates substantial support from multilateral banks, which in turn will help to finance Mr Funes's ambitious social programmes.

  ECONOMIC GROWTH: El Salvador will suffer from the slowest pace of GDP growth in Central America in 2013-17, reflecting a very weak local production and investment base, which limits domestic demand and leads to a persistently negative foreign balance. GDP growth in the first half of 2012 has been disappointing, averaging just 1.4%, and has been a dismal 0.9% in the first three quarters when measured by the monthly Índice de Volumen de Actividad Económica (IVAE, a close proxy for GDP). This has forced us to downgrade our full-year estimate yet again, to just 1.3% (from 1.6%), after which growth should pick up to 2% in 2013. We expect a stronger release of pent-up domestic demand during the remainder of the forecast period, although at an annual average rate of 2.6% GDP growth in 2014-17 it will be insufficient to address the country's development needs.

  INFLATION: Annual consumer price inflation has fallen from a yearly peak of 4.9% in February to just 0.7% in November, the sixth straight month in which inflation has been below 1%. As a result, we now expect inflation to reach a year-end level of just 2.1%, less than half the 5% rate seen at end-2011. Such low levels of inflation largely reflect lower international commodity prices for certain imported items, such as fuel, as well as a high base of comparison after inflation spiked to over 6% in mid-2011. In 2013, however, inflation should pick up to an average of 3.1%, with potential risks stemming from flooding and other weather-related disruptions. On the plus side, dollarisation will help keep inflation structurally low, at an average of 3.5% in 2014-17, which compares favourably with most countries in the region.

  EXCHANGE RATES: The dollarisation policy adopted in 2001 will not come under threat in 2013-17, reflecting its broad acceptance across the political spectrum. After weakening by 0.3% in 2011, we expect the real effective exchange rate (REER) to strengthen by 3.7% by 2017 compared to its 2011 level, partly owing to inflation differentials with the US and as other currencies in Central America (those of both El Salvador's key export customers and its international competitors) depreciate vis-à-vis the US dollar. Although this will affect the competitiveness of Salvadoran exporters, it should help bring stability to the country's overall macroeconomic environment.

  EXTERNAL SECTOR: A structural trade deficit will produce persistent current-account deficits in the outlook period, averaging 4.2% of GDP per year in 2013-17. El Salvador's trade balance is heavily exposed to changes in international commodity prices, with our forecasts of slightly lower oil and food prices in 2013-15 and higher exports owing to the Dominican Republic-Central America Free-Trade Agreement (DR-CAFTA) in the longer run preventing a widening of the trade deficit from an estimated 21% of GDP in 2012 in the forecast period. Nevertheless, a more significant improvement will be precluded by a strong structural dependence on imports given the country's weak domestic manufacturing base. The services and income balances will remain broadly stable in 2013-17, neither representing a particularly large share of the current account, while the transfers surplus will rise steadily in real terms in the forecast period, boosted by higher remittance inflows which have now recovered their pre-crisis levels in absolute terms. In relative terms, however, still-weak job creation in the US will prevent a return to 2006-08 levels, when remittances averaged 17.9% of GDP. Continued access to multilateral support and small but rising foreign direct investment (FDI) inflows, particularly towards the second half of the forecast period, will maintain a steady level of foreign reserves and adequate coverage to avoid any balance-of-payments difficulties. Nevertheless, FDI as a share of GDP will remain the lowest in Central America, averaging just 2.3% in 2013-17.

  January 07, 2013

• Forecast

  El Salvador: Country forecast summary

  Country forecast overview: Highlights

  • Although El Salvador's moderate leftist president, Mauricio Funes of the Frente Farabundo Martí de Liberación Nacional (FMLN), is popular and has pledged to increase social and infrastructure spending and reduce poverty, he will face challenges during the remainder of his term (ending in 2014), owing to slow economic growth and an opposition-led legislature. A truce between rival gangs has led to a fall in the murder rate but overall high levels of violence and crime will remain a serious problem for individuals and businesses, and a threat to institutional stability, forcing Mr Funes to take a tougher stance on security-related issues in order to avoid losing voters' support.
  • Legislative elections held in March 2012 resulted in a victory for the centre-right Alianza Republicana Nacionalista (Arena), which now holds 33 out of 84 seats. Both FMLN and Arena have begun gearing up for the 2014 election by officially designating their candidates; Salvador Sánchez Cerén, the current vice-president, for the FMLN, and Normán Quijano, the current mayor of the capital, San Salvador, for Arena.
  • Although the National Assembly passed a tax reform in December 2011 that will raise revenue by 0.7% of GDP compared with 2012, the government will still be forced to put in place some fiscal consolidation measures in 2013, as part of an IMF stand-by arrangement to reduce the public debt/GDP ratio to below 50% by 2015, although this is not likely to be achieved until after 2017.
  • Failure to meet IMF targets could jeopardise multilateral assistance, heightening financial and balance-of-payments risks. However, the Economist Intelligence Unit's baseline assumption is that the government will retain IMF support and gradually put its finances on a healthier footing. We also expect Mr Funes to maintain dollarisation (which will help keep inflationary pressure at bay) and honour foreign-debt payments.
  • Real GDP will expand very slowly in the short term as investment struggles to recover and as economic growth in the US, the country's main trading partner, remains weak. Salvadoran growth will be the lowest in Central America, averaging just 2.5% in 2013-17. Workers' remittances from the US will exceed their pre-crisis levels (in absolute terms, but not as a share of GDP) and provide some support to private consumption.
  • With a population estimated at 6.3m in 2012, El Salvador remains a very small market and opportunities will remain restricted by wide income inequality and low purchasing power. The country will benefit from the Dominican Republic-Central American Free-Trade Agreement (DR-CAFTA) with the US, but a weak production base will keep investment opportunities limited.

  

  January 04, 2013

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Country Briefing

Land area

20,720 sq km; volcanic upland and fertile coastal plains

Population

6.19m (2010 estimate)

Main towns

Population in '000, 2007 census:

 San Salvador (capital): 1,567 (Province) 316 (Municipality)

 Santa Ana: 524 (Province) 245 (Municipality)

 San Miguel: 434 (Province) 218 (Municipality)

Climate

Tropical on coast, sub-tropical on uplands

Weather in San Salvador (altitude 682 metres)

Hottest month, May, 19-33°C (average daily minimum and maximum); coldest month, December, 16-32°C; driest month, February, 5 mm average rainfall; wettest month, June, 328 mm average rainfall

Language

Spanish

Measures

Mixed: metric system and English measures; also old Spanish units

Currency

1 colón © = 100 centavos. On January 1st 2001 a fixed exchange rate of c8.75:US$1 was introduced by law and the US dollar became legal tender. The Monetary Integration Law provides for a dual currency system; in practice, the US dollar is used almost exclusively, except in some small, rural areas

Time

6 hours behind GMT

Public holidays

January 1st; January 16th (Peace Day); Maundy Thursday, Good Friday and Easter Sunday; May 1st (Labour Day); early August (San Salvador Day); September 15th (Independence Day); October 12th (Columbus Day); November 2nd and 5th; December 24th and 25th

January 07, 2013