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El Salvador
Updated as of Oct 2014

Original Publication Date: April 2014
Country Report
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2014, The PRS Group, Inc.

EL SALVADOR
ISSN: 1054-5492
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Political Risk Services

27-Oct-2014
Reproduction without written permission of The PRS Group is strictly prohibited.
El Salvador
Country Update
MOST LIKELY REGIMES AND THEIR PROBABILITIES
18-Month:
Divided Government 55%
Five-Year:
Divided Government 45%
FORECASTS OF RISK TO INTERNATIONAL BUSINESS
Financial
Direct
Turmoil
Transfer
Investment
18-Month:
Moderate
B
B+
Five-Year:
Moderate
BB
( ) Indicates change in rating.
KEY ECONOMIC FORECASTS

Real GDP
Years
Growth %
2009-2013(AVG)
0.8
2014(F)
1.8
2015-2019(F)
2.2
Export
Market
B
B-
* Indicates forecast of a new regime.
Inflation %
1.9
1.2
2.9
Current
Account ($bn)
-0.97
-1.40
-1.10
Implications
Salvador Snchez Cern, a former guerrilla commander and the leader of the
orthodox Marxist wing of the incumbent FMLN, assumed the presidency on
June 1. When he reached the end of his first 100 days in office last month,
Snchez Cerns approval rating stood at just 40%, compared to the 70%-plus
levels recorded by his two most recent predecessors at the same point in their
terms.
Although his opponents have warned that Snchez Cern is a radical leftist in
the mold of Hugo Chavez, the architect of Venezuelas deeply troubled socialist
system, the new presidents abbreviated honeymoon has less to do with the
manner in which he is governing than with the lack of results. Polling data
revealed that nearly two-thirds of respondents believe that the new government
has done nothing useful to solve either the countrys worrisome security
problem or address the weaknesses of the economy.
Country Update
27-Oct-2014 Page U-1

27-Oct-2014
El Salvador Country Update

That assessment is not entirely fair; the administration has implemented policies
in both areas, but the challenges are daunting, and it is too early to judge
whether those efforts will bear fruit. Moreover, the scope for aggressive action is
limited by the FMLNs minority status in the legislature.
The FMLN controls just 31 of 84 seats in the legislature, and, given the
governing partys hostile relationship with the main opposition Arena, Snchez
Cern will need to maintain friendly relations with the more centrist Gana if he
hopes to accomplish much of anything in the coming months. However, that
will become a bigger challenge going forward, as parties are preparing for
legislative and municipal elections in March 2015.
Opinion polls suggest that the distribution of seats is unlikely to change

significantly, as the FMLN and Arena are consistently polling within a
few percentage points of one another (frequently within the margin of error),
while Gana is maintaining its third-place status. Given the slump in Snchez
Cerns popular support, and the dim prospects for improving the situation in
the near future, it is highly doubtful that the FMLN will make significant gains
at next years elections. In fact, it is doubtful that the party can avoid a loss of
seats that will make it all the more dependent on the cooperation of Gana.
New President Already Encountering Headwinds

Salvador Snchez Cern, a former guerrilla commander and the leader of the
orthodox Marxist wing of the incumbent Farabundo Mart National Liberation
Front (FMLN), assumed the presidency on June 1. Snchez Cern served as
vice president under Mauricio Funes, a non-affiliated journalist tapped by the
FMLN as its presidential candidate in 2009 with the aim of putting a moderate
face on the leftist party. In contrast, Snchez Cerns nomination this year was
in keeping with a pledge by party leaders to back a truly red candidate in
2014.
Many voters who backed Norman Quijano, the candidate of the conservative
Nationalist Republican Alliance (Arena), did so because they view Snchez
Cern as a radical leftist in the mold of the late Hugo Chvez, the former
Venezuelan president whose heavily statist economic policies have damaged
that countrys economy to an extent that even its oil wealth can no longer
disguise. Arena did its level best to reinforce those concerns during the
campaign, a factor that contributed to the FMLNs very narrow margin of
victory.
Page U-2 27-Oct-2014
Country Update

27-Oct-2014

Snchez Cern has attempted to soften his public image, claiming that he
intends to govern more in the style of Uruguays Jos Mujica, another guerrillaturned-president who has followed a moderate course over a five-year term
that is nearing completion. The FMLNs campaign platform focused on the
goals of boosting employment, enhancing security, and improving the quality
of education, a fairly standard to-do list, and, upon taking office, the 69-yearold FMLN leader vowed to govern with honor, austerity, efficiency, and
transparency.
When he reached the end of his first 100 days in office last month, Snchez
Cerns approval rating stood at just 40%, compared to the 70%-plus levels
recorded by his two most recent predecessors at the same point in their terms.
His abbreviated honeymoon has less to with the manner in which he is
governing than with the lack of results. Polling data revealed that nearly twothirds of respondents believe that the new government has done nothing useful
to solve either the countrys worrisome security problem or address the
weaknesses of the economy.
Lack of Legislative Majority Will Continue to Be a Handicap
That assessment is not entirely fair, but the challenges are daunting, and it is
too early to judge whether his efforts will bear fruit. On the security front, the
president had the misfortune of taking office shortly after the collapse of a gang
truce that had contributed to a 40% decline in homicides. In the month before
Snchez Cern took office, the number of murders surged to 356, compared to
174 in May 2013.
Snchez Cern has promised to personally take the lead in establishing a
System of Citizen Security. In late August, leaders of the countrys largest
gangs announced an agreement to cease attacks on members of the police and
the military, a possible indication that the truce might be revived. Public
opposition to the government cutting deals with the gangs made it politically
unfeasible for Funes to formally endorse the previous truce, which proved to be
a factor in its collapse. Snchez Cern will be in an even weaker position on
that score.
With regard to the economy, the president has managed to secure El Salvadors
membership in the Petrocaribe alliance, whose participants are eligible to
receive Venezuelan oil supplies on very generous financial terms. He also
obtained a five-year, $277 million economic assistance package from the US,
Country Update

27-Oct-2014

through the Millennium Challenge Corporation, which Washington has

conditioned in part on a tightening of anti-money laundering regulations.
Snchez Cern has also followed through on plans to bolster the governments
finances with a package of tax measures, a move that won praise from the IMF.
In keeping with the FMLNs pledge of tax justice, the measures primarily
affect those at the upper end of the income scale, and include a minimum tax
aimed at closing loopholes, a 1% annual tax on company assets, and a 0.25%
levy on financial transactions.
Although the FMLN controls just 31 of 84 seats in the legislature, the support of
lawmakers from the Grand Alliance of National Unity (Gana), a main source of
backing for the Funes administration, ensured the majority required to tax
reforms. However, Arena lawmakers staged a walkout before the vote,
claiming that debate on the measures was wrongfully cut short, and were
joined by members of smaller parties. The incident suggests that Snchez
Cern will need to maintain friendly relations with Gana if he hopes to
accomplish much of anything in the coming months.
However, that will become a bigger challenge going forward, as parties are
preparing for legislative and municipal elections in March 2015. Opinion polls
suggest that the distribution of seats is unlikely to change significantly, as the
FMLN and Arena are consistently polling within a few percentage points of
one another (frequently within the margin of error), while Gana is maintaining
its third-place status. Given the slump in Snchez Cerns popular support,
and the dim prospects for improving the situation in the near future, it is highly
doubtful that the FMLN will make significant gains at next years elections. In
fact, it is doubtful that the party can avoid a loss of seats that will make it all the
more dependent on the cooperation of Gana.
Weak Growth, Low Inflation
Sales of coffee are the countrys main source of export revenue, but the crop has
been decimated by the spread of the roya fungus. The National Coffee Council
has estimated that the 2013/2014 harvest (which ended last month) was the
lowest in a century. Not surprisingly, exports of coffee decreased by more than
55% (year-on-year) in the JanuaryAugust period, contributing to an overall
decline in goods exports of more than 5% compared to the first eight months of
last year. That the overall drop has not been larger is attributable to the
beneficial effect of stronger demand in the US, which has boosted nontraditional exports, particularly textiles.
Page U-4 27-Oct-2014
Country Update
27-Oct-2014
Increased remittances from Salvadorans working in the US, which are on track
to top $4 billion in 2014, have not spurred stronger demand for imports, a fact
that will compound the positive effect of a larger transfers surplus on the
current account balance. However, the weakness of the agricultural sector will
hold overall real GDP growth to less than 2% once again in 2014, and the
current account shortfall will remain quite large, with a deficit of 5%6% of
GDP forecast this year.
Inflation averaged just 0.75% in the first half of the year, but bean shortages
resulting from drought conditions have driven food prices higher in recent
months, pushing the monthly inflation rate up to near 2% in the third quarter.
Weaker oil prices will limit the risk of an inflationary spike in the last three
months of the year, and the 12-month average is forecast to come in at just 1.2%
in 2014.
Economic Forecasts for the Three Alternative Regimes
Divided Government
2014
2015-2019
Center-Left Coalition
Centrist Coalition
Growth
(%)
Inflation
(%)
CACC
($bn)
Growth
(%)
Inflation
(%)
CACC
($bn)
Growth
(%)
Inflation
(%)
CACC
($bn)
1.8
2.2
1.2
2.9
-1.40
-1.10
2.2
2.4
1.1
3.6
-1.55
-1.35
0.8
3.2
1.0
3.2
-1.15
-0.80
Country Update
El Salvador
Table of Contents
Page
Country Update ..................................................................................................................................................... U-1
Country Forecast
Map..................................................................................................................................................................... 2
Highlights .......................................................................................................................................................... 3
Current Data...................................................................................................................................................... 5
Comment & Analysis ..................................................................................................................................... 11
Forecast Scenarios
Most Likely Five-Year Regime Scenario: Divided Government (45% Probability)....................... 15
Second Most Likely Five-Year Regime Scenario: Center-Left Coalition (40% Probability) ......... 24
Third Most Likely Five-Year Regime Scenario: Centrist Coalition (15% Probability) .................. 26
Forecast Summary.................................................................................................................................. 28
Political Framework
Players To Watch.................................................................................................................................... 31
Country Conditions
Climate for Investment & Trade
Overview ................................................................................................................................................... 1
Tariff and Non-tariff Barriers ................................................................................................................. 3
Policies ....................................................................................................................................................... 4
Legal Framework...................................................................................................................................... 6
Infrastructure ............................................................................................................................................ 9
Corruption and other Bureaucratic Obstacles .................................................................................... 10
International Agreements...................................................................................................................... 10
Labor Conditions.................................................................................................................................... 12
Background
Geography............................................................................................................................................... 13
Social Conditions.................................................................................................................................... 13
Government ............................................................................................................................................ 13
2014, The PRS Group, Inc.
ISSN: 1054-5492
El Salvador Country Forecast
Guatemala
Honduras
Santa Ana
Ahuachapn
Chalatenango
El Salvador
Sonsonate
Neuva San Salvador
San Salvador
Acajutla
Sensuntepeque
La Libertad
Cojutepeque
San Vicente
San Francisco
(Gotera)
Zacatecoluca
San
Miguel
Usulutn
La Union
North Pacific Ocean
REV2003
Page 2
Map

30-Apr-2014
El Salvador
Country Forecast
Highlights
MOST LIKELY REGIMES AND THEIR PROBABILITIES
18-Month:
Divided Government 55% (45%)
Five-Year:
Divided Government 45% (60%)
FORECASTS OF RISK TO INTERNATIONAL BUSINESS
Financial
Direct
Turmoil
Transfer
Investment
18-Month:
High (Moderate)
B
B+
Five-Year:
Moderate
B
B
( ) Indicates change in rating.
KEY ECONOMIC FORECASTS

Real GDP
Years
Growth %
2009-2013(AVG)
0.9
2014(F)
1.8
2015-2019(F)
2.2
Export
Market
B (B+)
B (B+)
* Indicates forecast of a new regime.
Inflation %
1.8
1.8
2.9
Current
Account ($bn)
-0.99
-1.40
-1.10
Narrow Win Will Reinforce Polarization

Key Points To Watch
A challenge to the official results of the run-off presidential election held in March has been
dismissed by the Supreme Court, but the razor-thin margin by which the victor, Salvador
Snchez Cern, won the second-round contest highlights a long-standing and persistent
political divide and reflects the fear of a sizeable section of the electorate that Snchez
Cern is either incapable of bridging that divide or will pursue policies that widen it
The president-elect came close to winning in the first round, taking 48.9% of the vote in a
three-way race. However, an overwhelming majority of voters who initially backed the
third-place finisher, former President Tony Saca, cast their ballots for Norman Quijano, the
candidate of the center-right Arena, in the second round, as did a large majority of the
nearly 300,000 voters who skipped the first round but turned out for the run-off contest
The fear of a radical shift in policy course under Snchez Cern that appears to have driven
the surge in support for Quijano in the second round may be overblown. When he takes
office in June, the new president will lack a reliable majority in the Legislative Assembly,
Highlights
30-Apr-2014 Page 3
30-Apr-2014
where the FMLN holds just 31 of the 84 seats. And with legislative elections scheduled for
March 2015, smaller parties may not be keen to tie themselves closely in the public mind to
a polarizing president
Lack of Investment Will Weigh on Growth
It is probably the case that Arenas attempts to paint Snchez Cern as a leftist ideologue
bent on asserting state control over the economy overstate the president-elects ambitions.
At a party conference held in early September 2013, the FMLN produced a campaign
platform that focused on three priority goals: boosting employment, enhancing security,
and improving the quality of education, none of which is inherently incompatible with a
generally market-based approach to economic management
Implementation will require money, which the FMLN has pledged will be raised in part
through a program of tax justice that reduces the tax burden of the poor and increases
that of the wealthy. However, Snchez Cern has indicated that he will attempt to
accomplish that objective by closing loopholes, rather than increasing the tax rates for those
at the higher end of the income ladder. Likewise, although mining companies will
continue to confront administrative obstacles to moving forward on stalled investment
projects, the moratorium on issuing mining-related permits represents the continuation of a
policy initiated by the Arena administration under former President Tony Saca
In general, while El Salvador will remain a risky destination for foreign investmentthe
collapse of a truce between the countrys deadly street gangs is an unwelcome
development on that scorethe danger that the government will adopt a significantly
more hostile posture toward foreign firms is not among the factors that should most
concern potential investors, especially in the near term
With the murder statistics pointing to near-term setbacks on the security front, Snchez
Cerns hopes of making a favorable early impression will most likely hinge on success at
reinvigorating El Salvadors lethargic economy, which posted real GDP growth of just 1.7%
in 2013, the weakest showing of any country in Central America. Unfortunately for the
new president, there is not much cause for optimism on that score
Over the medium term, both the ideological bent of the incoming administration and the
political obstacles arising from the governments lack of a reliable legislative majority will
hamper efforts to address the main deterrents to foreign investment, contribute to difficult
relations with multilateral lenders, and reduce the countrys ability to take full advantage
of free-trade agreements to boost exports, resulting in persistent sluggish growth averaging
just 2.2% per year through 2019.
Economic Forecasts for the Three Alternative Regimes

Divided Government
2014
2015-2019
Centrist Coalition
Growth
(%)
Inflation
(%)
CACC
($bn)
Growth
(%)
Inflation
(%)
CACC
($bn)
Growth
(%)
Inflation
(%)
CACC
($bn)
1.8
2.2
1.8
2.9
-1.40
-1.10
2.2
2.4
1.6
3.6
-1.55
-1.35
0.8
3.2
2.1
3.2
-1.15
-0.80
Page 4 30-Apr-2014
Highlights
27-Oct-2014
Political Fact Sheet
CAPITAL:
San Salvador
CONSTITUTION:
December 20, 1983
ADMINISTRATIVE SUBDIVISIONS:
14 departments
POPULATION:
2013: 6.34 million
AREA:
21,393 sq. km.
OFFICIAL LANGUAGE:
Spanish
STATUS OF PRESS:
free
SECTORS OF GOVERNMENT
PARTICIPATION:
utilities, public works, agriculture, banking,
broadcasting
CURRENCY EXCHANGE SYSTEM:
US dollar adopted as the official currency in
2001
EXCHANGE RATE:
9/27/2014 $1=0.79 euros
ELECTIONS:
Presidential elections are held every five
years; last, February 2 and March 9, 2014;
next, scheduled February 2019. Legislative
elections are held every three years; last,
March 11, 2012; next, scheduled March 2015.
Current Data
HEAD OF STATE:
President Salvador Snchez Cern (2014)
HEAD OF GOVERNMENT:
President Snchez (2014)
OFFICIALS:
Oscar Ortiz, Vice President
Orestes Ortez, Agriculture
Solomn Tharsis Lupez, Economy
Carlos Canjura, Education
Lina Pohl, Environment & Natural Resources
Carlos Cceres, Finance
Hugo Martnez, Foreign Affairs
Ramn Valencia, Government
Violeta Menjivar, Health
Sandra Guevara, Labor & Social Welfare
David Mungua Pays, National Defense
Benito Lara Hernndez, Public Security & Justice
Gerson Martnez, Public Works & Transport
Jos Duarte Durn, Tourism
LEGISLATURE:
Unicameral; 84-member Legislative Assembly.
Seat distribution: Nationalist Republican Alliance
(Arena), 33; Farabundo Marti National Liberation
Front (FMLN), 31; Grand Alliance of National
Unity (Gana), 11; National Coalition (CN), 7;
other, 2.
27-Oct-2014 Page 5
Reproduction without written permission of

The PRS Group is strictly prohibited.

27-Oct-2014
El Salvador
Databank
2004-2008
Average
2009-2013
Average
2004
2005
2006
2007
2008
Domestic Economic Indicators

GDP (Nominal, $bn)
Per Capita GDP ($)
Real GDP Growth Rate (%)
Inflation Rate (%)
Capital Investment ($bn)
Capital Investment/GDP (%)
Budget Revenues ($bn)
Budget Revenues/GDP (%)
Budget Expenditures ($bn)
Budget Expenditures/GDP (%)
Budget Balance ($bn)
Budget Balance/GDP (%)
Money Supply (M1, $bn)
Change in Real Wages (%)
Unemployment Rate (%)
18.59
3047
2.9
5.0
2.93
15.7
2.66
14.2
2.79
15.0
-0.13
-0.7
1.50
-0.8
6.6
22.66
3618
0.8
1.9
3.20
14.1
3.47
15.3
4.01
17.7
-0.54
-2.4
2.36
2.2
6.7
15.80
2612
1.9
4.5
2.47
15.6
2.09
13.2
2.27
14.4
-0.18
-1.1
1.21
-0.1
6.8
17.09
2815
3.5
4.7
2.61
15.3
2.30
13.5
2.48
14.5
-0.18
-1.1
1.29
0.8
7.2
18.55
3041
3.9
4.0
3.01
16.2
2.69
14.5
2.82
15.2
-0.13
-0.7
1.49
0.6
6.6
20.10
3284
3.8
4.6
3.28
16.3
2.97
14.8
3.01
15.0
-0.04
-0.2
1.73
-2.8
6.3
21.43
3485
1.3
7.3
3.26
15.2
3.24
15.1
3.37
15.7
-0.13
-0.6
1.76
-2.4
5.9
International Economic Indicators

Foreign Direct Investment ($bn)
Forex Reserves ($bn)
Gross Reserves (ex gold, $bn)
Gold Reserves ($bn)
Gross reserves (inc gold, $bn)
Total Foreign Debt ($bn)
Total Foreign Debt/GDP (%)
Debt Service ($bn)
Debt Service/XGS (%)
Current Account ($bn)
Current Account/GDP (%)
Current Account/XGS (%)
Exports ($bn)
Imports ($bn)
Trade Balance ($bn)
Exports of Services ($bn )
Income, credit ($bn)
Transfers, credit ($bn)
Exports G&S ($bn)
Liabilities ($bn)
Net Reserves ($bn)
Liquidity (months import cover)
Currency Exchange Rate*
Currency Change (%)*
0.18
1.93
1.97
0.10
2.07
10.03
54.1
0.91
11.1
-0.95
-5.0
-10.9
3.87
7.55
-3.68
1.05
0.21
3.39
8.52
0.24
1.83
2.9
1.317
-5.5
0.29
2.32
2.58
0.28
2.86
12.43
54.8
1.07
11.1
-0.97
-4.2
-9.7
4.26
8.59
-4.33
1.48
0.07
3.87
9.68
0.47
2.39
3.4
1.346
1.9
0.36
1.72
1.75
0.14
1.89
8.87
56.1
1.13
15.7
-0.63
-4.0
-8.8
3.34
6.00
-2.66
1.09
0.14
2.62
7.19
0.27
1.62
3.2
1.243
-9.9
0.06
1.69
1.72
0.11
1.83
9.42
55.1
1.23
16.0
-0.62
-3.6
-8.1
3.46
6.50
-3.04
0.95
0.17
3.11
7.69
0.26
1.57
2.9
1.246
-0.2
0.02
1.78
1.81
0.08
1.89
10.59
57.1
0.75
8.8
-0.77
-4.2
-9.0
3.78
7.42
-3.64
1.01
0.23
3.55
8.57
0.16
1.73
2.8
1.256
-0.8
0.11
2.07
2.11
0.09
2.20
10.13
50.4
0.64
6.8
-1.22
-6.1
-13.0
4.07
8.43
-4.36
1.13
0.31
3.84
9.35
0.13
2.07
2.9
1.371
-9.2
0.37
2.40
2.44
0.10
2.54
11.14
52.0
0.80
8.2
-1.53
-7.1
-15.6
4.70
9.38
-4.68
1.06
0.18
3.85
9.79
0.39
2.15
2.8
1.471
-7.3
Social Indicators
Population (million)
Population Growth (%)
Infant Deaths/1000
Persons under Age 15 (%)
Urban Population (%)
Urban Growth (%)
Literacy % pop.
Agricultural Work Force (%)
Industry-Commerce Work Force (%)
Services Work Force (%)
Unionized Work Force (%)
Energy - total consumption (1015 Btu)
Energy - consumption/head (109 Btu)
6.10
0.4
25
37
62
1.4
80
18
21
61
5
0.12
0.02
6.26
0.6
20
31
64
1.3
85
20
22
58
5
0.13
0.02
6.05
0.3
27
37
62
3.6
80
17
17
66
5
0.12
0.02
6.07
0.3
26
37
60
-2.9
80
17
17
66
5
0.12
0.02
6.10
0.5
25
37
61
2.2
80
19
23
58
5
0.12
0.02
6.12
0.3
23
36
62
1.9
81
19
23
58
5
0.12
0.02
6.15
0.5
23
36
63
2.1
81
19
23
58
5
0.13
0.02
Note: *value of local currency measured against the euro
Current Data
27-Oct-2014 ~ Page 6-7
Reproduction without written permission of

The PRS Group is strictly prohibited.

27-Oct-2014
El Salvador
Databank
2004-2008
Average
2009-2013
Average
2009
2010
2011
2012
2013
Domestic Economic Indicators

GDP (Nominal, $bn)
Per Capita GDP ($)
Real GDP Growth Rate (%)
Inflation Rate (%)
Capital Investment ($bn)
Capital Investment/GDP (%)
Budget Revenues ($bn)
Budget Revenues/GDP (%)
Budget Expenditures ($bn)
Budget Expenditures/GDP (%)
Budget Balance ($bn)
Budget Balance/GDP (%)
Money Supply (M1, $bn)
Change in Real Wages (%)
Unemployment Rate (%)
18.59
3047
2.9
5.0
2.93
15.7
2.66
14.2
2.79
15.0
-0.13
-0.7
1.50
-0.8
6.6
22.66
3618
0.8
1.9
3.20
14.1
3.47
15.3
4.01
17.7
-0.54
-2.4
2.36
2.2
6.7
20.66
3343
-3.1
0.6
2.78
13.5
2.86
13.8
3.63
17.6
-0.77
-3.7
1.98
-0.6
7.3
21.42
3444
1.4
1.2
2.85
13.3
3.21
15.0
3.79
17.7
-0.58
-2.7
2.39
-3.5
7.1
23.14
3696
2.2
5.1
3.32
14.4
3.56
15.4
4.08
17.6
-0.52
-2.3
2.39
-3.3
6.6
23.81
3779
1.8
1.8
3.37
14.2
3.76
15.8
4.17
17.5
-0.41
-1.7
2.49
4.1
6.1
24.26
3826
1.7
0.8
3.66
15.1
3.96
16.3
4.40
18.1
-0.44
-1.8
2.57
14.4
6.2
International Economic Indicators

Foreign Direct Investment ($bn)
Forex Reserves ($bn)
Gross Reserves (ex gold, $bn)
Gold Reserves ($bn)
Gross reserves (inc gold, $bn)
Total Foreign Debt ($bn)
Total Foreign Debt/GDP (%)
Debt Service ($bn)
Debt Service/XGS (%)
Current Account ($bn)
Current Account/GDP (%)
Current Account/XGS (%)
Exports ($bn)
Imports ($bn)
Trade Balance ($bn)
Exports of Services ($bn )
Income, credit ($bn)
Transfers, credit ($bn)
Exports G&S ($bn)
Liabilities ($bn)
Net Reserves ($bn)
Liquidity (months import cover)
Currency Exchange Rate*
Currency Change (%)*
0.18
1.93
1.97
0.10
2.07
10.03
54.1
0.91
11.1
-0.95
-5.0
-10.9
3.87
7.55
-3.68
1.05
0.21
3.39
8.52
0.24
1.83
2.9
1.317
-5.5
0.29
2.32
2.58
0.28
2.86
12.43
54.8
1.07
11.1
-0.97
-4.2
-9.7
4.26
8.59
-4.33
1.48
0.07
3.87
9.68
0.47
2.39
3.4
1.346
1.9
0.23
2.61
2.87
0.12
2.99
11.31
54.7
0.86
10.2
-0.31
-1.5
-3.7
3.93
7.04
-3.11
0.86
0.08
3.56
8.43
0.49
2.50
4.3
1.395
5.2
0.25
2.32
2.57
0.31
2.88
11.40
53.2
0.87
9.4
-0.57
-2.7
-6.1
4.58
8.11
-3.53
0.98
0.06
3.67
9.29
0.43
2.45
3.6
1.327
4.9
0.31
1.90
2.15
0.35
2.50
11.98
51.8
1.80
18.4
-1.11
-4.8
-11.4
4.24
9.01
-4.77
1.64
0.06
3.83
9.77
0.42
2.08
2.8
1.393
-5.0
0.47
2.55
2.81
0.37
3.18
13.36
56.1
0.97
9.4
-1.29
-5.4
-12.5
4.23
9.16
-4.93
1.86
0.07
4.12
10.28
0.44
2.74
3.6
1.286
7.7
0.20
2.22
2.48
0.27
2.75
14.09
58.1
0.86
8.1
-1.58
-6.5
-14.8
4.33
9.63
-5.30
2.07
0.07
4.18
10.65
0.57
2.18
2.7
1.328
-3.3
Social Indicators
Population (million)
Population Growth (%)
Infant Deaths/1000
Persons under Age 15 (%)
Urban Population (%)
Urban Growth (%)
Literacy % pop.
Agricultural Work Force (%)
Industry-Commerce Work Force (%)
Services Work Force (%)
Unionized Work Force (%)
Energy - total consumption (1015 Btu)
Energy - consumption/head (109 Btu)
6.10
0.4
25
37
62
1.4
80
18
21
61
5
0.12
0.02
6.26
0.6
20
31
64
1.3
85
20
22
58
5
0.13
0.02
6.18
0.5
22
35
63
0.5
86
19
23
58
5
0.12
0.02
6.22
0.6
21
32
64
2.3
84
19
23
58
5
0.12
0.02
6.26
0.6
20
31
64
0.8
84
19
23
58
5
0.13
0.02
6.30
0.6
19
30
65
2.2
85
21
21
58
5
0.13
0.02
6.34
0.6
19
29
65
0.6
85
21
21
58
5
0.13
0.02
Note: *value of local currency measured against the euro
Current Data
27-Oct-2014 ~ Page 6-7

30-Apr-2014
Comparison: El Salvador
Regional Real GDP Growth (2013): N&C America
Panama
Nicaragua
Haiti
Dominican Republic
Guatemala
Costa Rica
Cuba
Honduras
El Salvador
United States
Canada
Trinidad & Tobago
Mexico
Jamaica
0
(percent)
Regional Inflation Rates (2013): N&C America

Jamaica
Nicaragua
Haiti
Cuba
Trinidad & Tobago
Costa Rica
Honduras
Guatemala
Panama
Dominican Republic
Mexico
United States
Canada
El Salvador
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
(percent)
Page 8 30-Apr-2014
Current Data
Reproduction without written permission of The PRS Group is strictly prohibited

30-Apr-2014
Comparison: El Salvador
Regional Current Account/GDP (2013): N&C America
Trinidad & Tobago

Cuba
Mexico
United States
Canada
Guatemala
Dominican Republic
Costa Rica
El Salvador
Honduras
Haiti
Jamaica
Nicaragua
Panama
-15.0
-10.0
-5.0
0.0
5.0
10.0
(percent)
Economic Performance Profile

Country's Ranking Relative to All Countries
Covered by Political Risk Services
2009-2013
GDP Per Capita ($)
3615
Real GDP Growth (%)

Inflation (%)
0.9
1.8
Unemployment (%)
6.7
Capital Investment
(% of GDP)
13.9
-2.4
Budget Balance
(% of GDP)
Current Account
(% of GDP)
-4.3
Debt Service Ratio
6.7
Currency Change (%)
1.9
BEST 25%
NEXT 25%
NEXT 25%
Current Data
WORST 25%
30-Apr-2014 Page 9
Reproduction without written permission of The PRS Group is strictly prohibited
27-Oct-2014
Social Indicators
as of 2013
Primary Energy
Energy Consumption (1015 Btu):

9
Per Capita Consumption (10 Btu):
0.13
0.02
Population
Annual Growth
Infant Deaths per 1,000
Persons Under Age 15
Urban Population
Urban Growth
Literacy
0.6%
19
29%
65%
0.6%
85%
Work Force Distribution

Agriculture
Industry-Commerce
Services
Unions
21%
21%
58%
5%
Ethnic Groups
Mestizo (86%), white (13%), Amerindian (1%)
Languages
Spanish, Nahuatl
Religions
Roman Catholic (57%), Protestant (21%), other (5%), none (17%)
Page 10 27-Oct-2014
Current Data

30-Apr-2014
El Salvador
Country Forecast
Comment & Analysis
Close Presidential Race Will Reinforce Polarization
A challenge to the official results of the run-off presidential election held in March has
been dismissed by the Supreme Court. However, the razor-thin margin by which the
victor, Salvador Snchez Cern, won the second-round contest highlights a long-standing
and persistent political divide in El Salvador and reflects the fear of a sizeable section of
the electorate that Snchez Cern is either incapable of bridging that divide or will pursue
policies that widen it.
The president-elect is a former guerrilla commander and the leader of the orthodox
Marxist wing of the incumbent Farabundo Mart National Liberation Front (FMLN). He
is also the sitting vice president, and his victory in the run-off election seemed assured
after he won 48.9% of the vote in a three-way race in the first round of voting in early
February, and polls conducted in the run-up to the March face-off showed him holding a
double-digit leader over Norman Quijano, the candidate of the main opposition
Nationalist Republican Alliance (Arena).
However, the official tally showed Snchez Cern defeating Quijano by less than
6,400 votes, out of a total of nearly 3 million ballots submitted nationwide. Significantly,
some 293,000 Salvadorans who skipped the first round came out to vote in the second
round. In combination with the roughly 325,000 voters who cast their ballot for former
President Antonio Saca, a former leader of Arena who mounted a third-party campaign,
or one of the two other challengers from very minor parties, that put around
620,000 votes up for grabs in second round. By winning more than 70% of those votes,
Quijano came very close to snatching victory from the jaws of defeat.
Both the significant increase in turnout for the run-off contest and Quijanos impressive
success in attracting the support of previously uncommitted voters no doubt reflect the
success of Arenas campaign to paint Snchez Cern as a radical leftist in the mold of the
late Hugo Chvez, the former Venezuelan president whose heavily statist economic
policies have damaged that countrys economy to an extent that even Venezuelas oil
wealth can no longer disguise. The fact that campaigning for the second-round vote took
place against a backdrop of spreadingand increasingly deadlypolitical violence in
Caracas can only have magnified the impact of Arenas warnings about Snchez Cern on
Comment & Analysis
30-Apr-2014 Page 11

30-Apr-2014

the thinking of those not already ideologically disposed to dismissing them as

campaign lies.
Radical Policy Shift Unlikely
All of which could prove to be very significant as Snchez Cern begins his five-year term
in June. When he first takes office, his administration will lack a reliable majority in the
Legislative Assembly, where the FMLN holds just 31 of the 84 seats. And with legislative
elections scheduled for March 2015, smaller parties may not be keen to tie themselves
closely in the public mind to a polarizing president.
But beyond the practical barriers to pursuing any radical policy departures, at least in the
near term, it is probably the case that Arenas attempts to tar Snchez Cern with the
brush of chavismo overstate the president-elects ambitions. At a party conference held in
early September 2013, the FMLN produced a campaign platform that focused on three
priority goals: boosting employment, enhancing security, and improving the quality of
education, none of which is inherently incompatible with a generally market-based
approach to economic management.
In terms of job creation, key proposals include the creation of a public lender to ensure
access to credit for small businesses and stronger support for industries with high growth
and employment potential. The security and education initiatives are closely tied to one
another, with proposals to increase spending on social support for school-age children
framed as a means of preventing the drift of young Salvadorans into criminal gangs.
Other security-related measures included proposals to invest in state-of-the-art anti-crime
technology and drug rehabilitation centers, and alternatives to prisonincluding schoolbased rehabilitationfor youths convicted of minor offenses.
Of course, implementation will require money, which the FMLN has pledged will be
raised in part through a program of tax justice that reduces the tax burden of the poor
and increases that of the wealthy. Moreover, mining companies will continue to confront
administrative obstacles to moving forward on stalled investment projects, but the
moratorium on issuing mining-related permits represents the continuation of a policy
initiated by the Arena administration under Saca.
Snchez Cerns candidacy has been framed by the FMLN as the partys abandonment of
the pragmatic approach that resulted in its endorsement of the moderate leftist
incumbent, Mauricio Funes, as its presidential candidate in 2009, in favor of a truly red
agenda. However, the president-elect stated after his victory that strengthening relations
with the US will be a priority for his administration, which suggests that pragmatism will
not be jettisoned entirely. In general, while El Salvador will remain a risky destination for
Page 12 30-Apr-2014
Comment & Analysis

30-Apr-2014

foreign investment, the possibility of the incoming governments adoption of a

significantly more hostile posture toward foreign firms is not among the factors that
should most concern potential investors.
Collapse of Gang Truce Will Heighten Security Risks
El Salvador consistently ranks near the top among countries with the highest murder
rates in the world; according to the most recent UN statistics, the per capita homicide rate
of El Salvador is second only to that of Honduras among nations not currently at war.
Much of the violence is attributable to El Salvadors role as a major shipping route for
international drug-traffickers, which has reinforced the deadly rivalry between urban
criminal gangs (maras). Warfare between Mara Salvatrucha (MS-13) and Barrio 18 helped
to push the total number of homicides above 4,000 as recently as 2011.
A truce between the maras brokered by church leaders reduced the total number of
murders by as much as 1,000 annually in 20122013. But while Salvadorans viewed the
reduction in homicides favorably, they opposed direct negotiations between the
government and the gangs. For that reason, the Funes administration never formally
endorsed the truce, and the public release of documents suggesting that the government
had rewarded gang leaders for their part in reducing the number of homicides under an
arrangement that smacked of capitulation to extortion all but ruled out any chance that
Snchez Cern or Quijano might voice support for the truce during the campaign.
Indeed, Quijano actually pledged to take aggressive action against the gangs if elected.
Just one week prior to the run-off election, the head of the National Civilian Police (PNC)
announced that the cease-fire between the gangs had collapsed, and officials affiliated
with security-related agencies have since echoed that assertion, citing statistics that
revealed the number of homicides increased by 44% (year-on-year) over the first three
months of 2014. Assuming the truce cannot be salvaged, the trend will likely be
confirmed (and may even accelerate) in the coming months.
As in the past, most of the victims will be gang members, but perceptions of a generalized
increase in the risk of violence will further undermine the already weak credibility of El
Salvadors security apparatus, with negative connotations for the countrys attractiveness
to foreign investors. In the World Economic Forums 20132014 Global Competitiveness
Report, El Salvador ranked 101st overall out of 148 countries surveyed, but ranked 147th
with regard to the influence of organized crime and 142nd in terms of the business costs
associated with crime and violence.
Comment & Analysis
30-Apr-2014 Page 13

30-Apr-2014

Weak Coffee Production Limits Potential for Economic Rebound

reinvigorating El Salvadors lethargic economy, which posted real GDP growth of just
1.7% in 2013, the weakest showing of any country in Central America. Unfortunately for
the new president, there is not much cause for optimism on that score.
Sales of coffee are the countrys main source of export revenue, but the crop has been
decimated by the spread of the roya fungus. The National Coffee Council is forecasting
that the 2013/2014 harvest will result in a 36% decline in output compared to 2012/2013.
Since October 2013, coffee export earnings have fallen by nearly 50%, resulting in a 16%
year-on-year drop in overall exports over the same period, despite the beneficial effect of
stronger demand in the US, which has boosted non-traditional exports, particularly
textiles.
Increased remittances from Salvadorans working in the US will contribute to stronger
domestic demand, as well as a narrowing of the current account deficit. However, the
weakness of the agricultural sector is forecast to hold overall real GDP growth below 2%
once again in 2014, and the current account shortfall will remain quite large, with a deficit
of 5%6% of GDP expected this year.
El Salvadors use of the US dollar as its official currency will help to contain upward
pressure on consumer prices in the near term, but dependence on imports for energy and
food will leave the economy vulnerable to volatility in global prices. Russias use of its
influence over European gas supplies for leverage in a brewing diplomatic battle with the
US and the EU over Ukraine holds the potential to produce a price shock. However,
given the fragility of the economic recovery in the west, a steep increase in global fuel
prices is unlikely to be sustained for very long, as the negative effect on economic
performance in the US and Europe would probably trigger a fairly rapid reversal of the
trend. On balance, inflation is forecast to average less than 2% in 2014, and the risks to
the forecast are weighted toward the down side.
Page 14 30-Apr-2014
Comment & Analysis

30-Apr-2014
El Salvador
Country Forecast
Forecast Scenarios
SUMMARY OF 18-MONTH FORECAST
Divided
Government 55%
REGIMES & PROBABILITIES
30%
Populist Coalition
15%
SUMMARY OF FIVE-YEAR FORECAST
Divided
Government 45%
40%
Centrist Coalition
15%
Most Likely Regime Scenario

18-Month Forecast Period:
Divided Government (55% Probability)
Five-Year Forecast Period:
Divided Government (45% Probability)
Divided
Government
2014
2015-2019
Growth
(%)
1.8
2.2
Inflation
(%)
1.8
2.9
CACC
($bn)
-1.40
-1.10
The razor-thin margin by which Salvador Snchez Cern won the run-off presidential
election in March 2014 highlights a long-standing and persistent political divide in El
Salvador, and reflects the fear of a sizeable section of the electorate that Snchez Cerna
former guerrilla and the leader of the orthodox Marxist faction of the incumbent
Farabundo Mart National Liberation Front (FLMLN)is either not capable of bridging
that divide or will pursue policies that widen it.
Snchez Cern, who will be sworn into office for a five-year term on June 1, is the sitting
vice president, and he appeared to be assured of an easy victory in the run-off election
after he won 48.9% of the vote in a three-way race in the first round of voting in early
February. Indeed, polls conducted in the run-up to the March face-off showed him
holding a double-digit leader over Norman Quijano, the candidate of the conservative
Nationalist Republican Alliance (Arena).
However, the official tally showed Snchez Cern defeating Quijano by less than
6,400 votes, out of a total of nearly 3 million ballots submitted nationwide. By winning
more than 70% of the votes cast by the roughly 625,000 Salvadorans who either sat out the
Forecast Scenarios
30-Apr-2014 Page 15

30-Apr-2014

first round of voting or voted for someone other than the two main candidates in the
February election, Quijano came very close to pulling off a huge upset. His near
comeback is a testament to the success of Arenas campaign to paint Snchez Cern as a
radical leftist in the mold of the late Hugo Chvez, the former Venezuelan president
whose heavily statist economic policies have damaged that countrys economy to an
extent that even Venezuelas oil wealth can no longer disguise.
The fact that the FMLN candidate won anyway does not mean that most voters are
comfortable with a Chvez-like ideologue (although some undoubtedly are), but rather
that they accepted as sincere Snchez Cerns assurances that he would govern as a
moderate, in the style of the current leader of Uruguay, Jos Mujica, another former
guerrilla turned president. However, the fact that he only barely won means that a very
large minority of the population remains skeptical on that point.
On that basis, a case can be made that it is in Snchez Cerns interest to adopt a
moderate posture. The legislative arithmetic suggests that he may have little choice in the
early going. The FMLN currently controls just 31 or the 84 seats in the Legislative
Assembly, and with legislative elections scheduled for March 2015, smaller parties may
not be keen to tie themselves closely in the public mind to a polarizing president.
Both Arena and the local business community, represented by National Private
Enterprise Association (ANEP), have accepted the president-elects invitation to
participate in a dialogue process aimed at smoothing the leadership transition. However,
the new-found amity will probably not last long, as preparations for the legislative
campaign will likely produce a reversion to form, with Arena seizing upon any missteps
by the new administration and any scrap of negative news as confirmation of its
prediction that Snchez Cerns election would spell disaster for El Salvador. On that
score, the prospects for much in the way of good news about either the economy or the
domestic security situation that might bolster the FMLNs electoral chances are dim.
In any case, Arenas fear-based electoral strategy is better suited to a legislative campaign
than to a winner-take-all contest like a run-off presidential election. If Arena makes gains
in March 2015, the FMLN administration will be in a weaker position to cobble together a
majority coalition, even on an ad hoc basis, and the challenges in that regard will be all
the greater in the probable event that seats picked up by Arena will come largely at the
expense of its chief rival for the conservative vote, former President Tony Sacas Grand
Alliance of National Unity (Gana).
Lack of Majority Will Limit Risk of Negative Policy Shifts
Beyond the practical barriers to pursuing any radical policy departures, at least in the
near term, it is probably the case that Arenas attempts to tar Snchez Cern with the
brush of chavismo overstate the president-elects ambitions. The actions taken by Snchez
Page 16 30-Apr-2014
Forecast Scenarios

30-Apr-2014

Cern and Vice President-elect Oscar Ortiz are consistent with the signals from other
FMLN leaders of an acknowledgment on their part that achieving the economic
development required to produce jobs and ensure adequate funding for the new
administrations social programs will require a constructive relationship with the private
sector, one based on the type of cooperation and compromise that has been notably
lacking under the incumbent administration of President Mauricio Funes.
The same traits that convinced many Salvadoran voters to take a chance on Funes in
2009his lack of a guerrilla pedigree, his self-identification as a moderate leftist, and the
fact that he was not even officially a member of the FMLNleft him poorly positioned to
pull the FMLN toward the center, which will be absolutely essential if an FMLN
administration hopes to have a constructive relationship with the business community.
Snchez Cern will not be hampered by similar handicaps.
At a party conference held in early September 2013, the FMLN produced a campaign
platform that focused on three priority goals: boosting employment, enhancing security,
and improving the quality of education, none of which is inherently incompatible with a
generally market-based approach to economic management. In terms of job creation, key
proposals include the creation of a public lender to ensure access to credit for small
businesses and stronger support for industries with high growth and employment
potential.
The security and education initiatives are closely tied to one another, with proposals to
increase spending on the current FMLN administrations social support for school-age
children framed as a means of preventing the drift of young Salvadorans into criminal
gangs. Other security-related measures included proposals to invest in state-of-the-art
anti-crime technology and drug rehabilitation centers, and alternatives to prison
including school-based rehabilitationfor youths convicted of minor offenses.
Of course, implementation will require money, which the FMLN has pledged will be
raised in part through a program of tax justice that reduces the tax burden of the poor
and increases that of the wealthy. However, Snchez Cern has indicated that the focus
will be on closing loopholes currently exploited by wealthy taxpayers, rather than
increases in the rates applied to the income of individuals or the profits of businesses.
Likewise, although mining companies will continue to confront administrative obstacles
to moving forward on stalled investment projects, the moratorium on issuing miningrelated permits represents the continuation of a policy initiated by the Arena
administration under Saca. In addition, the president-elect stated after his victory that
strengthening relations with the US will be a high priority for his administration.
Forecast Scenarios
30-Apr-2014 Page 17

30-Apr-2014

None of which is to say that Snchez Cern is not tailoring his rhetoric to fit his political
situation, and would not adopt a more stridently leftist posture if such an approach
enjoyed the backing of a legislative majority. Indeed, his candidacy was initially framed
by the FMLN as the partys abandonment of the pragmatic approach that led to its
endorsement of Funes as its presidential candidate in 2009 in favor of promoting a truly
red agenda. But it appears that he his prepared to adjust his strategy to fit the
circumstances, and will maintain a generally pragmatic approach if the FMLN fails to win
control of the Legislative Assembly.
In short, while El Salvador will remain a risky destination for foreign investment, the
possibility of the incoming governments adoption of a significantly more hostile posture
toward foreign firms is not among the factors that should most concern potential
investors.
In its most recent Doing Business report, the World Bank ranked El Salvador among the
bottom 25% of countries surveyed in the areas of ease of starting a business, dealing with
construction permits, investor protection, and paying taxes. In that vein, ANEP will
lobby for measures aimed at reducing bureaucratic obstacles and simplifying the tax
system, all of which would garner the support of enough opposition lawmakers to secure
passage. However, an FMLN administration will be wary of pursuing reforms that
threaten the interests of its core constituencies. Consequently, there is little chance that
Snchez Cerns government will experiment with labor-market reforms or otherwise
make an effort to reduce the wage-related costs for business, which, in any case, will
remain low by global standards.
In terms of corruption, El Salvador trails only Costa Rica among the least corrupt Central
American countries and is near the middle of the pack among nations in the Western
Hemisphere according to Transparency Internationals most recent Corruption
Perceptions Index. However, with a score of just 38 (with 100 representing a corruptionfree climate), there is plenty of room for improvement. Any serious anti-corruption effort
would undoubtedly focus on current and former members of Arena, which controlled the
government throughout the post-civil war period until losing the presidency in 2009.
That group includes the founding leaders of Gana, a party whose support is likely to be
crucial to securing passage of the administrations legislative initiatives. As such, the
FMLN government will have a political incentive to move cautiously, if at all, on the anticorruption front.
El Salvador consistently ranks near the top among countries with the highest murder
rates in the world; according to the most recent UN statistics, the per capita homicide rate
of El Salvador is second only to that of Honduras among nations not currently at war.
Page 18 30-Apr-2014
Forecast Scenarios

30-Apr-2014

Much of the violence is attributable to El Salvadors role as a major shipping route for
international drug-traffickers, which has reinforced the deadly rivalry between urban
criminal gangs (maras). Warfare between Mara Salvatrucha (MS-13) and Barrio 18 helped
to push the total number of homicides above 4,000 as recently as 2011.
A truce between the maras brokered by church leaders reduced the total number of
murders by as much as 1,000 annually in 20122013. But while Salvadorans viewed the
reduction in homicides favorably, they opposed direct negotiations between the
government and the gangs. For that reason, the Funes administration never formally
endorsed the truce, and the public release of documents suggesting that the government
had rewarded gang leaders for their part in reducing the number of homicides under an
arrangement that smacked of capitulation to extortion all but ruled out any chance that
Snchez Cern or Quijano might voice support for the truce during the campaign.
Indeed, Quijano actually pledged to take aggressive action against the gangs if elected.
Just one week prior to the run-off election, the head of the National Civilian Police (PNC)
announced that the cease-fire between the gangs had collapsed, and officials affiliated
with security-related agencies have since echoed that assertion, citing statistics that
revealed the number of homicides increased by 44% (year-on-year) over the first three
months of 2014. Assuming the truce cannot be salvaged, the trend will likely be
confirmed (and may even accelerate) in the coming months.
As in the past, most of the victims will be gang members, but perceptions of a generalized
increase in the risk of violence will further undermine the already weak credibility of El
Salvadors security apparatus, with negative connotations for the countrys attractiveness
to foreign investors. In the World Economic Forums 20132014 Global Competitiveness
Report, El Salvador ranked 101st overall out of 148 countries surveyed, but ranked 147th
with regard to the influence of organized crime and 142nd in terms of the business costs
associated with crime and violence.
Prior to the initiation of the truce with the gangs in 2012, the Salvadoran Chamber of
Commerce and Industry put the cost of crime for businesses at about $1.2 billion per year
(or about 6% of GDP), with some $600 million spent by businesses each year on security
services, about $300 million lost to theft, and $300 million spent by the government on
hospital and emergency costs associated with crime. In fact, the true cost is undoubtedly
much higher, as even the Chamber conceded that its figures do not accurately measure
the amount that businesses spend on protection payments to gangs, which business
owners are reluctant to report owing to fear of retaliation by extortionists.
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The new administration will inherit a long-running dispute with foreign companies that
have been forced to halt their gold mining operations owing to the governments refusal
to issue the necessary permits, apparently without legal justification. Although the gold
mining projects hold the promise to produce rapid benefits in terms of investment and
jobs, the associated environmental risks have produced a groundswell of popular
opposition.
In August 2012, the government approved a proposal to suspend all mining activity until
such time as the structures are in place to address the environmental and social impacts
of mining activity. On the one hand, the FMLN and anti-mining groups claim that the
proposal does not go far enough and are demanding an outright ban. On the other hand,
advocates of mining, including conservative opinion shapers in the US, have
characterized the indefinite suspension as evidence of Funes hostility to foreign
investment.
In fact, the projects were initially halted by the Arena government headed by Saca. While
Arena is ideologically disposed to promoting the development of the mining sector, the
party is divided over the issue. Exploratory drilling for the controversial El Dorado
project has allegedly resulted in the drying up of water supplies used by local ranchers
and farmers in Cabaas, who are an important part of Arenas rural constituency, and
have aligned themselves with anti-mining activists.
Having survived the potentially fatal split that followed the 2009 elections, Arena is
unlikely to risk opening an urban-rural fissure by reversing its position on the issue.
Consequently, the FMLN government is unlikely to face heavy pressure from the
opposition to reverse its position on the issue, and may even be able to achieve the
necessary legislative backing to institute a permanent ban. Beyond the potential financial
penalties El Salvador stands to incur in the event of a judgment in favor of mining
companies that are pursuing international legal action, the dispute will do nothing to
reassure other companies that are reluctant to take a chance on El Salvador owing to
concerns about security and the reliability of the legal system.
Reflecting the influence of Alexander Segovia, who served as Funes chief economic
adviser during the 2009 campaign, and prior to that was an adviser to the Treasury in
Sacas administration, the incumbent administration disavowed a number of the FMLNs
traditional positions. Chief among these was the FMLNs long-standing pledge to
discontinue the use of the US dollar as the local currency, a policy that has contributed to
low inflation and increased macroeconomic stability since 2001, but has also restricted the
flexibility of fiscal policy. An FMLN administration that lacks a reliable legislative
majority is unlikely to chance course in this area.
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Lacking recourse to expansion of the money supply, the government must finance any
increases in spending through increased revenues, domestic borrowing, or the
assumption of foreign debt. Competition between the government and the private sector
for domestic loans would inevitably result in a counterproductive increase in commercial
interest rates. But the assumption of foreign debt requires the approval of a supermajority in the Legislative Assembly, which may be difficult for Snchez Cerns
government to muster unless it makes concessions to the opposition that limit the scope
for promised increases in social spending. For that reason, Snchez Cern could be
inclined to introduce tax increases, but he may have difficulty securing the backing of
even a simple majority if he attempts to skew the burden of tax hikes too heavily toward
the upper end of the income ladder.
Salvadorans Souring on Free Trade
El Salvador has been a regional leader in pursuing trade initiatives, and the previous
Arena administration banked heavily on DR-CAFTA, which was ratified in March 2006,
to provide a significant boost to the economy. Officials predicted that the treaty would
fuel consistent double-digit export growth, pushing total exports to $10 billion by 2015.
When the early results proved disappointing, the Arena government responded by
stepping up its efforts to diversify the countrys trade links, and Funes also assigned high
priority to a free-trade agenda. However, spreading popular opposition to free trade,
particularly among groups that represent key constituencies of the FMLN, will
discourage aggressive pursuit of new deals under the incoming administration.
El Salvador negotiates free-trade agreements (FTAs) in concert with other Central
American countries, which as a group are pursuing trade deals with Canada and Peru,
have initiated trade talks with Pacific Rim nations, and have concluded an FTA with
Mexico and an association agreement with the EU that must be ratified by the legislatures
of the individual countries before coming into force.
Talks with Canada are unlikely to make much progress, as Prime Minister Stephen
Harpers government focuses instead on much more significant trade deals with the EU
and India. Moreover, the still unresolved legal battle between the government in San
Salvador and Pacific Rim, a Canadian gold mining company, will remain a sore spot in
bilateral relations.
Despite strong opposition from social groups, El Salvador ratified the Central American
association agreement with the EU in July 2013. Debate over the EU agreement revealed
the degree to which popular perceptions of free trade have been shaped by assessments
of the impact of DR-CAFTA, a pact that has its defenders, but has failed to deliver as
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expected. There are numerous reasons whychief among them the global recession in
20082009but the fact remains that the treaty has not produced any measurable
economic improvement.
In fact, from the perspective of the Salvadoran population, the most significant result of
DR-CAFTA has been a negative one, namely, the surrender of the governments authority
to protect the countrys health and environment. The use of DR-CAFTA as the basis
upon which mining companies are pursuing legal action against the government has
reinforced popular doubts about the wisdom of signing trade agreements with countries
that wield significantly greater economic and political heft than El Salvador.
In general, tariffs will decline according to agreed reduction schedules. However, with
25% of the labor force employed in the agriculture sector, the government will be hesitant
to remove the barriers to agricultural imports. Non-tariff barriers, especially on the
import of poultry and other agricultural products, will be reduced very slowly, if at all.
Customs procedures have already been streamlined. A computerized, satellite-based
system to process customs forms and declarations is already in operation. Further
reductions in bureaucratic obstacles will be more difficult. Given the potential for serious
fiscal slippage that might create pressure on foreign reserves, the possibility of a
substantial increase in payment delays cannot be ruled out.
Legislative Weakness an Obstacle to Addressing Security Issues
Despite the countrys social inequities, political turmoil has been markedly reduced since
the signing of the peace accords in 1992. Nevertheless, the political climate is highly
polarized, and the temptation to exploit public anger for political ends will be strong on
both sides of the ideological divide. The risk will become more pronounced if, as is
likely, Arena recaptures the presidency in 2014. The Marxist leadership of the FMLN will
not refrain from organizing street-level demonstrations designed to intimidate policy
makers if an Arena administration proves resistant to more subtle means of discouraging
policies perceived to benefit wealthier Salvadorans at the expense of the poor.
The main threat to internal stability for the past decade has been an epidemic of violent
crime stemming from the incorporation of flourishing youth gangs (maras) into
international drug-smuggling networks. Successive administrations have sought to
address the problem with various formulations of the Firm Hand (Mano Dura) approach
first introduced by President Francisco Flores. In addition to the increased use of the
military for domestic policing, anti-crime measures have included stiffer penalties for
gang members convicted of crimes and the criminalization of mere membership in
a gang.
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The more recent sharp decline in the number of homicides has been attributed to a truce
among the gangs brokered by leaders of the Catholic Church, but the government refused
to formally endorse the plan, and law enforcement officials suggested that their efforts
are the real reason for the improvement in security conditions. A plan to establish
sanctuary cities in which the gangs agreed to refrain from open warfare was embraced
by mayors from both Arena and the FMLN, but the national administration was reluctant
to endorse any scheme that might be interpreted as turning a blind eye to criminal
activity in exchange for assurances of peace. In any case, all evidence suggests that the
truce has collapsed, creating a significant risk of a spike in violent crime going forward.
The drug trade that has fueled the murder epidemic is becoming more deeply entrenched
throughout Central America, and even if the maras were to agree to end their
participation in the trafficking business, it is very likely that someone else would be
positioned to take their place. A lasting solution to the problem will require regional
cooperation, which can only be accomplished with the active participation of the national
administration. To the extent that a sustained improvement relies on substantive action
on the policy front, a scenario of divided government will create an impediment to lasting
progress.
Weak Investment Will Weigh on Growth
reinvigorating El Salvadors lethargic economy, which posted real GDP growth of just
1.7% in 2013, the weakest showing of any country in Central America. Unfortunately for
the new president, there is not much cause for optimism on that score.
Sales of coffee are the countrys main source of export revenue, but the crop has been
decimated by the spread of the roya fungus. The National Coffee Council is forecasting
that the 2013/2014 harvest will result in a 36% decline in output compared to 2012/2013.
Since October 2013, coffee export earnings have fallen by nearly 50%, resulting in a 16%
year-on-year drop in overall exports over the same period, despite the beneficial effect of
stronger demand in the US, which has boosted non-traditional exports, particularly
textiles.
Increased remittances from Salvadorans working in the US will contribute to stronger
domestic demand, as well as a narrowing of the current account deficit. However, the
weakness of the agricultural sector is forecast to hold overall real GDP growth below 2%
once again in 2014, and the current account shortfall will remain quite large, with a deficit
of 5%6% of GDP expected this year.
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El Salvadors use of the US dollar as its official currency will help to contain upward
pressure on consumer prices in the near term, but dependence on imports for energy and
food will leave the economy vulnerable to volatility in global prices. Russias use of its
influence over European gas supplies for leverage in a brewing diplomatic battle with the
US and the EU over Ukraine holds the potential to produce a price shock. However,
given the fragility of the economic recovery in the west, a steep increase in global fuel
prices is unlikely to be sustained for very long, as the negative effect on economic
performance in the US and Europe would probably trigger a fairly rapid reversal of the
trend. On balance, inflation is forecast to average less than 2% in 2014, and the risks to
the forecast are weighted toward the down side.
Over the medium term, both the ideological bent of the incoming administration and the
political obstacles arising from the governments lack of a reliable legislative majority will
hamper efforts to address the main deterrents to foreign investment, contribute to
difficult relations with multilateral lenders, and reduce the countrys ability to take full
advantage of free-trade agreements to boost exports, resulting in persistent sluggish
growth averaging just 2.2% per year through 2019. Strengthening global demand will
drive up prices for imported staples over the medium term, but currency stability will
limit the risk of worrisome inflation, which is forecast to average a relatively benign 2.9%
annually over the five-year period.
Low levels of investment and a lack of progress toward implementing key trade
agreements will hamper development of the export sector over the medium term, a factor
that in combination with higher prices for commodity imports will contribute to sizeable
deficits averaging $1.1 billion per year through 2019. The government will need to
remain on reasonably good terms with the US, the IMF, and other multilateral lenders if
balance-of-payments difficulties are to be avoided, and the same factors weighing on the
growth forecast will contribute to risks in that regard.
Second Most Likely Regime Scenario
Center-Left Coalition (30% Probability)
Center-Left Coalition (40% Probability)
Center-Left
Coalition
2014
2015-2019
Growth
(%)
2.2
2.4
Inflation
(%)
1.6
3.6
CACC
($bn)
-1.55
-1.35
Voters will head back to the polls in a little less than one year to elect the 84 members of
the Legislative Assembly. Although not the most likely scenario, it is possible that the
FMLN could win control of the legislative branch, or at least gain enough seats to
facilitate the formation of a fairly stable majority coalition.
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Following its disappointing loss in the presidential election, Arena has been troubled by
internal strife, with reformist faction pushing for a house cleaning. Corruption
allegations against former President Francisco Flores during the run-up to the February
election hurt Arena in the first round of voting. Flores, who served as an adviser to
Quijano during the campaign, has been removed from any visible position of authority,
and frustration with Quijanos campaign has fueled calls for significant changes in the
way the party chooses it candidates.
Lacking a unifying figure capable of keeping the factional strife in check, it is possible
that Arena could suffer another split. Short of that, internal battles could hamper the
effectiveness of the partys legislative campaign. In addition, Quijanos post-election
suggestion of a possible military coup instigated by what he claimed was widespread
electoral fraud may have alienated Salvadorans who have painful memories of the
12-year civil war that ended in 1992. Taking such factors into consideration, it is hardly
beyond the realm of possibility that the FMLN might score a decisive victory in
March 2015.
Long term, it is possible that a FMLN-led government will not solve many of the
countrys most persistent problems. Under this scenario, a centrist coalition could
emerge that prioritizes a middle-of-the-road approach that has been successful in such
neighbors as Costa Rica.
Moderate Tack to the Left
A government dominated by the FMLN would be more likely to pursue an overtly leftist
policy course. During the presidential campaign, Quijano repeatedly warned that a
government headed by Snchez Cern would use Venezuelas statist model as his guide.
Given the record of the outgoing FMLN administration and Snchez Cerns own
comments since winning the presidency, that dire prediction seems to be something of an
overstatement.
However, it is very likely that an FMLN administration that enjoys the benefit of a solid
legislative majority would pursue a more leftward policy course. At this point, moves to
nationalize the mining sector would be largely symbolic, given the effective moratorium
that has been in place for several years. Wealthy Salvadorans and private-sector
businesses could expect to see their tax bills increase, the government would avoid the
openly hostile approach of the leftist regimes in Venezuela and Ecuador, instead taking a
more measured approach that involved negotiation and trade-offs with the aim of
increasing revenues without driving away badly needed investment.
While noting that DR-CAFTA and dollarization have produced many negative
consequences, FMLN leaders have acknowledged that the abandonment of either would
cause more problems than would be solved. FMLN moderates acknowledge the benefits
Forecast Scenarios
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of trade liberalization, and a government in which they played a role in shaping policy
would support limited moves to reduce tariffs and pursue other forms of trade
liberalization.
Little Change in Turmoil Risk
Regardless of who controls the government, security-related risks will be a fact of life in
El Salvador. However, should the government fail to make progress on reducing poverty
or shoring up the economic foundation, the sense of betrayal among the countrys poor
could inject an added measure of hostility to anti-government protests that occurred,
creating a somewhat higher risk of civil disturbances.
More Stable Political Climate Would Not Benefit Economy
Although the policies implemented under a center-left government would not contribute
to a more attractive climate for investment, neither would they represent a dramatic
break from the status quo. Consequently, the economy could be expected to muddle
along as it has in recent years. Growth and inflation would reflect the impact of
previously implemented measures, but few steps would be taken to build upon those
measures in ways that might lead to a substantial economic improvement over the
forecast period. Real GDP growth would average 2.4% annually through 2019, and
inflation would be higher than under the most likely scenario, reflecting the impact of a
more expansionary fiscal policy on domestic demand. Similarly, stronger demand for
imports would produce larger current account deficits averaging $1.35 billion per year
through 2019.
Third Most Likely Regime Scenario
Populist Coalition (15% Probability)
Centrist Coalition (15% Probability)
Centrist
Coalition
2014
2015-2019
Growth
(%)
0.8
3.2
Inflation
(%)
2.1
3.2
CACC
($bn)
-1.15
-0.80
Although unlikely, it is possible that Snchez Cern might pull together a majority
coalition willing to back a program that eschews fiscal discipline and embraces an
unabashedly leftist policy agenda. The policies of a populist left regime would pose a
threat to both social stability and the integrity of Salvadoran democracy, resulting in an
even more highly polarized domestic climate and a deterioration of the countrys
standing within the international community. Investors would steer clear of the country,
and trade partners might seek to pressure the government by imposing trade restrictions.
The US has threatened to suspend Nicaraguas participation in DR-CAFTA over its
failure to meet democratic standards, and might be inclined to apply pressure on a
populist Salvadoran government in the same way.
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Looking further ahead, it is possible that conditions of divided government in the near
term could become the basis for the election of a centrist presidential candidate in 2018,
and the establishment of a majority coalition made up of the more moderate elements of
both the FMLN and Arena.
A government that could claim a majority without the support of the hard-left faction of
the FMLN or the most conservative elements within Arena would be more likely to
implement meaningful economic reforms, but ideological differences within such a
coalition would still be sufficiently large as to contribute to delays in approving
legislation, and the risk of rupturing the alliance would encourage caution on the part of
the president. Even so, some limited advances could be expected in the areas of
privatization and business deregulation. A centrist coalition government would take
steps to streamline the bureaucracy, but efforts to root out corruption would face
resistance from vested interests, limiting the potential for any substantial reduction in
informal obstacles faced by businesses.
The creation of a relatively stable centrist coalition that includes moderate factions from
both the left and the right would facilitate efforts to secure passage of reform measures
required to meet the conditions of lending agreements with the IMF, providing a firmer
economic foundation on which to take steps to alleviate the poverty that has fueled
polarization and contributed to social instability.
Medium-term Economic Outlook Somewhat Brighter
A centrist governments cautious approach to reform would probably not encourage a
significant increase in levels of foreign investment. That said, assuming the governments
policies received a favorable response from the IMF, even limited steps to enhance the
climate for business could be expected to result in a somewhat better economic
performance than would be the case under conditions of divided government. Growth
and inflation would reflect the impact of previously implemented measures, but few
steps would be taken to build upon those measures in ways that might lead to a
substantial economic improvement over the forecast period. Real GDP growth would
average 3.2% annually through 2019, and inflation would average 3.2% per year over the
five-year forecast period. Improved export performance would offset the effect of more
robust domestic demand on the external balances, and the current account deficit would
average $800 million per year through 2019.
Forecast Scenarios
30-Apr-2014 Page 27
30-Apr-2014
Forecast Summary
SUMMARY OF 18-MONTH FORECAST
Divided
Government 55%
Center-Left
Coalition 30%
Populist Coalition
15%
Moderate
SLIGHTLY MORE
SLIGHTLY MORE
SLIGHTLY MORE
Equity
Moderate
Same
SLIGHTLY MORE
MORE
Operations
Moderate
SLIGHTLY MORE
Same
SLIGHTLY MORE
Taxation
Moderate
Same
SLIGHTLY MORE
MORE
Repatriation
Moderate
Same
Same
Same
Exchange
Low
Same
Same
SLIGHTLY MORE
Tariffs
Moderate
SLIGHTLY LESS
SLIGHTLY LESS
Same
Other Barriers
Moderate
Same
Same
SLIGHTLY MORE
Payment Delays
Moderate
Same
Same
SLIGHTLY MORE
Expansion
Moderate
SLIGHTLY MORE
SLIGHTLY MORE
MORE
Labor Costs
Low
Same
SLIGHTLY MORE
SLIGHTLY MORE
Foreign Debt
High
Same
SLIGHTLY MORE
SLIGHTLY MORE

RISK FACTORS
CURRENT
Turmoil
Investment
Trade
Economic Policy
SUMMARY OF FIVE-YEAR FORECAST

Divided
Government 45%
Center-Left
Coalition 40%
Centrist Coalition
15%
Moderate
Same
Same
Same
Investment
Moderate
Same
Same
SLIGHTLY LESS
Trade
Moderate
SLIGHTLY LESS
Same
SLIGHTLY LESS
Domestic
High
Same
Same
Same
International
Moderate
Same
SLIGHTLY MORE
Same

RISK FACTORS
BASE
Turmoil
Restrictions
Economic Problems
* When present, indicates forecast of a new regime
Page 28 30-Apr-2014
Forecast Scenarios
30-Apr-2014
El Salvador
Real GDP Growth Under Alternative Regimes
Divided Government
Centrist Coalition
4.0
3.0
(percent)
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
2009
2010
2011
2012
2013e
2014f
20152019f
El Salvador
Inflation Under Alternative Regimes
Divided Government
Centrist Coalition
(percent)
5
4
3
2
1
0
2009
2010
2011
2012
2013e
2014f
20152019f
El Salvador
Current Account Under Alternative Regimes
Divided Government
Centrist Coalition
-0.2
($billions)
-0.4
-0.6
-0.8
-1.0
-1.2
-1.4
-1.6
-1.8
2009
Forecast Scenarios
2010
2011
2012
2013e
2014f
20152019f
30-Apr-2014 Page 29

30-Apr-2014
El Salvador
Country Forecast
Political Framework
Players To Watch
Salvador Snchez Cern: The former guerilla leader came close to wining an outright
majority in the first round of presidential voting in February 2014, but only narrowly
secured victory in the March run-off contest, defeating his center-right opponent,
Norman Quijano, by a margin of less than 7,000 votes. The close call reflects widespread
public fears that the FMLN leader will steer El Salvador down a socialist path, but
Snchez Cern has offered assurances that he intends to govern as a moderate. In any
case, his lack of a legislative majority will limit the scope for any significant changes in
policy course until after the next round of legislative elections in March 2015. Since
winning the election, Snchez Cern has reached out to both Arena and the local business
community, represented by National Private Enterprise Association, and FMLN
spokespeople have noted that the new president recognizes that achieving his
administrations social policy goals will require the cooperation of private-sector
investors. Although there is every reason to believe that Snchez Cern would tack
somewhat to the left if he manages to secure a reliable legislative majority, sustaining that
support will be difficult unless he manages to produce tangible economic improvements
that are unlikely to materialize if he veers too far to the left. The increasingly
questionable ability of Venezuela to subsidize hard-left regimes in the region is another
factor that diminishes the risk of any radical policy departures by the new administration.
Farabundo Marti National Liberation Front: The perennial leader of the opposition won
the presidency for the first time in 2009, a result largely attributable to its nomination of a
moderate leftist as its presidential candidate. The hard-left leaders of the governing party
made no secret of their displeasure with the moderate course pursued by President
Mauricio Funes, and the nomination of Snchez Cern, an orthodox Marxist, as the
partys presidential candidate for 2014 pointed to the adoption of a more traditionally
leftist posture. However, the partys campaign platform was largely uncontroversial, and
Snchez Cern has signaled his intention to govern in the manner of the moderate leftist
governments in Brazil and Uruguay. Unlike Funes, Snchez Cerns leftist credentials are
impeccable, a fact that places him in a stronger position to pull his party to the center
without triggering factional infighting.
Political Framework
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30-Apr-2014

Nationalist Republican Alliance: The countrys dominant party throughout the postcivil war period until it lost the presidency in 2009, Arena overcame the handicap created
by the defection of more than a dozen of its lawmakers in the aftermath of its defeat by
netting an additional 14 seats at the March 2012 legislative elections, making it the largest
single party in the Legislative Assembly. The conservative party failed to recapture the
presidency from the FMLN in 2014, and the defeat has triggered demands from within
the party for changes, particularly with regard to how Arena chooses its candidates. The
party will need to regroup quickly if it hopes to retain its dominant position in the
Legislative Assembly following elections scheduled for March 2015. If it manages to do
so, Arena will be in a strong position to prevent the FMLN administration from pursuing
any radical policy departures, which would be difficult if the government is unable to
secure legislative approval to take on additional foreign debt.
Grand Alliance for National Unity: Gana was formed in late 2009 by Arena dissidents
allied with former President Antonio Saca, and by the end of 2011 it ranks had swelled to
16 lawmakers. The bloc had no formal agreement with the government, but its backing
enabled Funes to win quick approval of his budgets. Gana won just 11 seats at the March
2012 legislative elections, and owing to the FMLNs diminished presence in the
legislature, its support is no longer sufficient to provide the government with a majority.
Its success or failure at the March 2015 elections could determine whether Snchez Cern
is able to rely on a legislative majority at any point during his five-year term.
Page 32 30-Apr-2014
Political Framework

1-Jan-2014
El Salvador
Country Conditions
Overview
Openness to Foreign Investment
El Salvador is open to and encourages foreign investment and is currently taking steps to improve the
nations investment climate. Foreign direct investment (FDI) in El Salvador was forecasted to reach
approximately $258 million in 2012 (according to the Economic Commission for Latin America and the
Caribbean-ECLAC), a 41 percent decline from $441 million in 2011. Meanwhile, El Salvadors regional
neighbors have experienced increasing levels of FDI inflows, attracting on average more than $1.0 billion
per country in 2012.
Inconsistent and burdensome commercial regulation, a sometimes ineffective judicial system, and
widespread violent crime encumber El Salvadors investment climate. CAFTA-DR, the free trade agreement
among Central American countries, the Dominican Republic, and the United States, includes an investment
chapter and other provisions that have strengthened investment dispute resolution for member state
companies with interests in El Salvador.
In 2011, El Salvador and the United States initiated the Partnership for Growth (PFG), a new cooperative
development model that aligns complimentary commitments by both partner governments. November
2012 marked the first year of PFG implementation, and the Partnership has taken steps to foster a more
favorable environment for business and investment, and improve human capital and infrastructure. For
more information on PFG, access the link on the Embassys website at http://sansalvador.usembassy.gov/.
In October 2012, the El Salvadoran government presented to the National Assembly a package of legislation
to promote investment and facilitate commerce, including a new Contract Stability Law and Electronic
Signature Law, and updates to the existing Free Trade Zone Law and International Services Law. If
approved in the Assembly, the Contract Stability Law would provide greater investor assurances across a
variety of sectors on issues surrounding taxes, customs and immigration, and repatriation of earnings.
Proposed updates to the Free Trade Zone Law would extend many of the current laws investment
incentives while establishing additional investment and employment criteria to comply with World Trade
Organization (WTO) commitments. Updates to the International Services Law would expand the scope of
the service industries covered under the current legislation.
A new Public-Private Partnership Law has been pending approval in the National Assembly since January
2012. The government is actively supporting its approval and has stated publicly throughout 2012 that the
countrys future development, particularly in infrastructure, depends on public-private partnerships.
The existing 1999 Investment Law grants equal treatment to foreign and domestic investors. With the
exception of small businesses (ten or fewer employees and sales of less than $68,571/year), foreign
investors may freely establish businesses in El Salvador. Investors who begin operations with ten or fewer
employees must present plans to increase employment to the National Investment Office (ONI) of the
Ministry of Economy. The Investment Law also provides that underground resources (minerals) belong to
the state. The state may grant concessions for their extraction, but there have been no new permits for
1-Jan-2014 Page 1

1-Jan-2014
El Salvador Country Conditions

mineral extraction in recent years. Per the constitution, foreigners are forbidden from acquiring rural
property unless it is used for industrial purposes.
Additional current statues governing foreign investment in El Salvador include the Export Reactivation
Law, Free Trade Zone Law, and the International Services Law. Other statutes establishing the basic legal
framework for investment include the Monetary Integration Law, Banking Law, Insurance Companies Law,
Securities Market Law, intellectual property laws, special legislation governing privatizations and credit
cards, Competition Law, and the Tourism Law.
FDI into El Salvador originates from across the globe, including the United States, Panama, Mexico, Spain,
Canada, Costa Rica, Guatemala, Germany, and Italy, and targets a variety of sectors of the economy.
Energy: El Salvador is currently seeking to expand its electricity generation capacity by attracting
investment to support 350 megawatts worth of long-term power purchase agreements. The auction is
expected to bring in up to $1 billion and conclude with a contract awarded by the end of 2013. A lack of
recent investment to build additional capacity over the last several years has driven electricity prices up.
Media and Telecommunications: Privatization and foreign investment have helped to modernize
Salvadoran media and telecommunications. The only remaining restrictions for foreign investors are on free
reception television and AM/FM radio broadcasting, where foreign ownership cannot exceed 49 percent of
equity. There has been extensive growth in the cellular phone industry. In 2012, Mexican-owned America
Movil attempted to purchase one of the five major service providers, but abandoned its bid after the
Salvadoran anti-trust authority required it give up some of its existing spectrum. Additionally, El Salvador
is making preliminary plans to switch to digital television.
Aeronautics: In December 2012, El Salvador hosted an international aeronautics forum to promote itself as a
cluster for aeronautics and transportation logistics in the region. El Salvador is already a hub for AviancaTaca, a major Central American airline, and home to Aeroman, a commercial aircraft maintenance, repair
and overhaul facility. The government is also developing plans to modernize and expand El Salvadors
international airport.
Textiles and Apparel: El Salvadors free trade zones host many international textile and apparel firms,
including Fruit of the Loom and Hanes brands. A revision to the free trade zone regime in El Salvador,
currently under consideration in the Legislative Assembly, is expected to support continued investment in
the sector.
Banking: Financial and banking services in El Salvador are provided by a range of institutions. Ten private
sector banks (non-state owned) account for 87 percent of the industrys loan portfolio, two state-owned
banks hold six percent, and seven cooperatives and savings and loans hold the remaining seven percent.
Transparency of the Regulatory System

The laws and regulations of El Salvador are relatively transparent and generally foster competition.
However, the government does control the price of some goods and services, including electricity, liquid
propane gas, gasoline, fares on public transport, and medicines. The government also directly subsidizes
water services and sets the distribution-service tariff.
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Bureaucratic procedures have improved in recent years and are relatively streamlined for foreign investors.
Regulatory agencies, however, are often understaffed and inexperienced, especially when dealing with
complex issues. New foreign investors should review the regulatory environment carefully.
The Superintendent of Electricity and Telecommunications (SIGET), a regulatory agency modeled after a
public utilities commission, regulates electricity and telecommunications. SIGET oversees electricity rates,
telecommunications, and distribution of electromagnetic frequencies.
In 2003, the government amended the 1996 Electricity Law with the intention of reducing volatility in the
wholesale market and thereby stabilizing retail electricity prices and encouraging new investment. The new
reforms to the law allowed SIGET to develop a cost-based pricing model for the electricity sector, which
they introduced to the marketplace in 2011. The new system requires the adoption of additional long-term
contracts and should alleviate various market distortions. The GOES subsidizes consumers using up to
200 kWh monthly. The electricity subsidy costs the GOES upwards of $150 million annually. Energy sector
companies have warned that ever-changing subsidies and the GOES inability to pay the subsidies in a
timely manner have eroded the financial stability of the power sector and discouraged needed investment
in new generation capacity.
The 2004 Competition Law defines a series of anticompetitive practices such as collusion to fix prices, limit
production, and rig bids. Vertical arrangements, tying (conditioning the sale of one product on the sale of
another), and exclusive dealing are also outlawed. Certain abuses of dominant market position are also
prohibited, for example, creating barriers to entry by other firms, predatory pricing to drive out
competitors, price discrimination and similar actions when intended to limit competition are illegal. The
law created an autonomous Superintendent of Competition responsible for enforcing the law. The
Superintendent of Competitions decisions, particularly against gasoline and energy companies, have
resulted in a series of lawsuits filed against the El Salvadoran government.
Foreign/Free Trade Zones/Ports

As of December 2012, there were 16 free trade zones operating in El Salvador. They are comprised of more
than 200 companies operating in areas such as textiles, clothing, distribution centers, call centers, business
process outsourcing, agribusiness, agriculture, electronics, and metallurgy. Owned primarily by
Salvadoran, U.S., Taiwanese, and Korean investors, the firms employ approximately 71,500 people. The
section above on Performance Requirements and Incentives outlines the benefits available to investors in
these zones.
Tariff and Non-Tariff Barriers

There are few trade barriers that affect the import of manufactured goods, but El Salvador does maintain
some barriers to services. For example, notaries must be Salvadoran and certain professionals, such as
architects, must be licensed locally.
Rice and pork are both subject to import quota systems and 40% duties. Rice millers are required to buy rice
locally. When there is insufficient local supply, the Ministry of Agriculture allows imports under the quota,
and after the import quota has been exhausted, if there is still a need for imported rice, rough or milled rice
can be freely imported, subject to a 40% duty. Pork importers face a similar arrangement, to first buy
locally, then import, subject to a 40% duty. Under CAFTA-DR, El Salvador committed to a 15-year phaseout of all tariffs on pork, except for bacon and most offal, which have been eliminated. Only a fixed part of
the tariff-rate quota (TRQ) will remain subject to a performance requirement, and the requirement will be
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eliminated in 15 years. Tariffs for rice will also be phased out over a 15-year period with no performance
requirements.
El Salvador has used sanitary standards to prevent the import of raw poultry and eggs. In 2009, the
CAFTA-DR poultry quota was expanded to El Salvador and U.S. poultry is now imported into the country.
After discussions with USG officials, El Salvador inspected a U.S. processed egg facility and granted permit
to exports to El Salvador from that facility. The Food Safety Inspection Services (FSIS) has requested
equivalence for the U.S. processed egg inspection system and is working with Salvadoran authorities to set
a date for the audit.
The Salvadoran government requires that rice shipments be fumigated at importers cost unless they are
accompanied by a U.S. Department of Agriculture (USDA) certificate stating that the rice is free of Tilletia
Barclayana. However, since there is no chemical treatment that is both practical and effective against the
plant pathogen, tilletia barclayana, USDA cannot issue these certificates. El Salvador failed to notify the
WTO, under the Agreement, on the application of Sanitary and Phytosanitary Measures, when it imposed
this requirement. The CAFTA-DR chapter on sanitary and phytosanitary (SPS) measures provides that the
signatory countries accept each others mechanisms for inspection.
Policies
Conversion and Transfer
There are no restrictions on transferring funds associated with investment out of the country. Foreign
businesses can freely remit or reinvest profits, repatriate capital, and bring in capital for additional
investment. The 1999 Investment Law allows unrestricted remittance of royalties and fees from the use of
foreign patents, trademarks, technical assistance, and other services. Tax reforms introduced in 2011,
however, levy a five percent tax on national or foreign shareholders profits. Moreover, shareholders
domiciled in a state, country or territory with low or no taxes or that is considered a tax haven, will instead
be subject to a tax of twenty-five percent.
The Monetary Integration Law dollarized El Salvador in 2001, and the U.S. dollar now freely circulates and
can be used in all transactions. One objective of dollarization was to make El Salvador more attractive to
foreign investors. U.S. dollars account for nearly all currency in circulation. Salvadoran banks, in
accordance with the law, must keep all accounts in dollars. Dollarization is supported by family
remittancesalmost all from the United Statesthat were $3.2 billion in 2011.
Performance Requirements
El Salvadors Investment Law does not require investors to meet export targets, transfer technology,
incorporate a specific percentage of local content, or fulfill other performance criteria. Foreign investors and
domestic firms are eligible for the same incentives. Exports of goods and services are levied zero value
added tax.
The 1998 Free Trade Zones Law is designed to attract investment in a wide range of activities, although at
present the vast majority of the businesses in export processing zones are clothing assembly plants. The El
Salvadoran government recognizes the law violates its WTO obligations and in October of 2012 presented
an updated free trade zone law to the Legislative Assembly. It remains pending. A Salvadoran partner is
not needed to operate in a free trade zone, and some textile operations are completely foreign-owned.
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The 1998 law established rules for export processing zones (free zones) and bonded areas. The free zones
are outside the nations customs jurisdiction while the bonded areas are within its jurisdiction but subject to
special treatment. Local and foreign companies can establish themselves in a free zone to produce goods or
services for export or to provide services linked to international trade. The regulations for the bonded areas
are similar.
Firms located in the free zones and bonded areas enjoy the following benefits:
Exemption from all duties and taxes on imports of raw materials and the machinery and
equipment needed to produce for export;
Exemption from taxes for fuels and lubricants used for producing exports if these are not
domestically produced;
Exemption from income tax, municipal taxes on company assets and property; and
Exemption from taxes on real estate transfers that are related to export activity.
Companies in the free zones are also allowed to sell goods or services in the Salvadoran market if they pay
applicable taxes for the proportion sold locally. Additional rules apply to textile and apparel products.
Under the 1990 Export Reactivation Law, firms were able to apply for tax rebates (drawbacks) of six
percent of the FOB value of manufactured or processed exports shipped outside the Central American
Common Market area. This benefit was eliminated in 2011. However, later that same year the El Salvador
government approved new regulations to support producers. The regulations include a new form of
drawback, approved by the World Trade Organization (WTO), which consists of a refund of custom
duties paid on imported inputs and intermediate goods exclusively used in the production of goods
exported outside of the Central American region. The new regulations also include the creation of a
Business Production Promotion Committee with the participation of the private and public sector to work
on policies to strengthen the export sector, and the creation of an Export and Import Center. Since 2011, all
import and export procedures are handled by the Export and Import Center. More information about the
procedures can be found at: https://www.centrex.gob.sv/scx_html/quienes_somos.html.
The International Services Law, approved in 2007, establishes service parks and centers with incentives
similar to those received by El Salvadors free trade zones. Service park developers will be exempted from
income tax for 15 years, municipal taxes for ten years, and real estate transfer taxes. Service park
administrators will be exempted from income tax for 15 years and from municipal taxes for ten years. Firms
located in the service parks/service centers receive the following permanent benefits:
Tariff exemption for the import of capital goods, machinery, equipment, tools, supplies,
accessories, furniture and other goods needed for the development of the service activities
(goods and services such as food and beverages, tobacco products, alcoholic beverages, rental
fees, home equipment and furniture, cleaning articles, luxury goods, transportation vehicles, and
hotel services are not exempted from taxation);
Exemption from income tax and municipal taxes on company assets. The tax exemptions remain
in place as long as the service operations are functioning.
Service firms operating under the existing Free Trade Zone Law are also covered. However, if the services
are provided to the Salvadoran market, they cannot receive the benefits of the International Services Law.
The following services are covered under the International Services Law: international distribution,
logistical international operations, call centers, information technology, research and development, marine
vessels repair and maintenance, aircraft repair and maintenance, entrepreneurial processes (i.e., business
process outsourcing), hospital-medical services, and international financial services.
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The proposed updates to the International Services Law, submitted to the Legislative Assembly for
approval in October of 2012, would expand the service sectors covered by the law. If approved in the
Assembly, the updated Law would cover: container repair and maintenance, technological equipment
repair, elderly and convalescent care, telemedicine, and cinematography postproduction services.
To qualify for benefits, businesses must invest at least $150,000 during the first year of operations, including
working capital and fixed assets, must hire no fewer than 10 permanent workers, and must have at least a
one-year contract. For hospital/medical services, the minimum investment in fixed assets must be
$10 million if they are to provide surgical services or a minimum of $3 million if they do not provide
surgical services. Hospital or medical services must be located outside of major metropolitan areas. The
medical service must also be provided only to patients with insurance.
In 2005, the government approved a tourism law to spur investment in the sector. The law establishes fiscal
incentives for those who invest a minimum of $50,000 in tourism-related projects in El Salvador. Incentives
include a ten-year income tax exemption and no duties on imports of capital and other goods, subject to
some limitations. The investor also benefits from a five-year exemption from land acquisition taxes and a
50 percent break in municipal taxes. To take advantage of these incentives, the enterprise must contribute
five percent of profits during the exemption period to a government-administered Tourism Promotion
Fund.
Those who plan to live and work in El Salvador for an extended period will need to obtain temporary
residency, which may be renewed periodically. Under Article 11 of the Investment Law, foreigners with
investments equal to or more than 4,000 minimum monthly wages ($768,400) have the right to receive
Investors Residence, permitting them to work and stay in the country. Such residency can be requested
within 30 days after the investment has been registered. The residency permit covers the investor and his
family and is issued for one year, subject to extension on a yearly basis.
Most companies employ a local lawyer to manage the process of obtaining residency. The American
Chamber of Commerce in El Salvador can also help its members with the process. Labor regulations require
that 90 percent of the labor force at plants and in clerical jobs be Salvadoran. There are fewer nationality
restrictions for professional and technical jobs.
U.S. companies have complained of variable customs valuations and inconsistent enforcement of both
customs regulations and CAFTA-DR preferential treatment for goods coming from CAFTA-DR countries
aside from the United States. While advances have been made to implement a fast-track system for
shipments via express courier companies, it has not been fully implemented. The clearance procedures for
samples which arrive via express shipments is still an ongoing issue.
Legal Framework
Expropriation and Compensation
El Salvadors 1983 constitution allows the government to expropriate private property for reasons of public
utility or social interest, and indemnification can take place either before or after the fact. There are no
recent cases of expropriation. In 1980, a rural/agricultural land reform established that no single natural or
legal person could own more than 245 hectares (605 acres) of land, and the government expropriated the
land of some large landholders. While banks were nationalized in 1980, beginning in 1990 they were
returned to private ownership. A 2003 amendment to the 1996 Electricity Law contains a provision that,
while not authorizing expropriation, requires energy generating companies to obtain government approval
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before removing fixed capital from the country. According to the government, this provision is intended to
prevent energy supply disruptions.
In April 2009, the U.S. subsidiary of Pacific Rim, a Canadian mining company, filed an international
arbitration proceeding against the El Salvadoran government alleging various violations of the obligations
in Chapter Ten of the CAFTA-DR. Pacific Rim alleges that the El Salvadoran government wrongfully
refused to grant environmental permits for its mineral exploitation projects after it had spent $75 million in
exploration costs. In June 2012, the CAFTA-DR claims were dismissed because the International Center for
Settlement of Investment Disputes (ICSID) tribunal determined the U.S. subsidiary lacked substantial
business activities in the United States to qualify as a party under CAFTA-DR. The tribunal found,
however, that it did have jurisdiction to proceed on an evaluation of the merits of the Canadian
corporations claims under Salvadoran investment law. The case is ongoing.
Dispute Settlement
While foreign investors can seek redress of commercial disputes through El Salvadoran courts, investors
have found that seeking resolution to problems through the slow-moving domestic legal system can be
costly and unproductive. The course of some cases has shown that the legal system is subject to
manipulation by private interests, and final rulings are sometimes not enforced. Where possible, arbitration
clauses, preferably with a foreign venue, should be included in commercial contracts as a means to resolve
business disputes. Investors should make sure that all contracts are carefully drafted and that the
relationships with local firms are specifically defined. Some U.S. firms have been embroiled in major legal
disputes in recent years, in cases where they asserted that a contract with a Salvadoran firm either had
formally ended or never existed, but Salvadoran courts have ruled that the contract remained in force. Local
investment and commercial dispute resolution proceedings in El Salvador routinely last many years.
El Salvadors commercial law is based on the Commercial Code and the Code for Mercantile Processes.
There is a mercantile court system for resolving commercial disputes, although there have been complaints
about its slow processes and erratic rulings, particularly at the Supreme Court level. The Commercial Code,
Code of Mercantile Processes, and Banking Law contain sections that deal with bankruptcy. There is no
separate bankruptcy law or bankruptcy court. In 2008, the Legislative Assembly passed several reforms to
the Commercial Code and the Commerce Registry Law. The reforms were aimed to facilitate trade and
investment through a reduction of the steps and requirements needed to register, develop, and close a
business. The reforms include lower capital requirements to open a business and fewer requirements to
increase the capital of the business or to dissolve a business. With the reforms, all documents and payments
can be submitted electronically to the Commerce Registry.
Article 15 of the 1999 Investment Law states that disputes between foreign investors and the government
will be submitted for arbitration to the International Center for Settlement of Investment Disputes (ICSID),
a World Bank affiliated organization. In 2002, the government approved a law to allow private sector
organizations to establish arbitration centers for the resolution of commercial disputes, including those
involving foreign investors. Under CAFTA-DR, investor rights are protected by an effective, impartial
procedure for dispute settlement that is fully transparent, as described in chapter 20 of the agreement.
Submissions to dispute panels and panel hearings are open to the public, and interested parties have the
opportunity to submit their views.
In 2009, El Salvador modified its arbitration law to allow a party to an arbitration dispute the ability to
appeal a ruling to the Salvadoran courts. Investors have complained that the modification dilutes the
fundamental efficacy of arbitration as an alternative method of resolving disputes.
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Right to Ownership and Establishment

There are restrictions on land ownership. No single natural or legal personSalvadoran or foreigncan
own more than 245 hectares (605 acres). Rural lands cannot be acquired by foreigners from countries where
Salvadorans do not enjoy the same right. Foreign citizens and private companies can freely establish
businesses in El Salvador. The only exception for this is in some cases involving small business. A 2001
fishing law allows foreigners to engage in commercial fishing anywhere in Salvadoran waters providing
they obtain a license from CENDEPESCA, a government entity.
Protection of Property Rights

Private property, both movable and real estate, is recognized and protected in El Salvador. Companies that
plan to buy land or other real estate are advised to conduct a thorough search of the propertys title prior to
purchase.
In 2005, El Salvador revised several laws to comply with CAFTA-DRs provisions on intellectual property
rights (IPR). The Intellectual Property Promotion and Protection Law (1993, revised in 2005), Law of
Trademarks and Other Distinctive Signs (2002, revised in 2005), and Penal Code establish the legal
framework to protect IPR. Investors must register trademarks, patents, copyrights, and other forms of
intellectual property at the National Registry Centers Intellectual Property Office to protect their
investments. Reforms passed in 2005 extended the copyright term from 50 to 70 years. In 2008, the
government enacted test data exclusivity regulations for pharmaceuticals and agrochemicals, which will be
protected for 5 and 10 years respectively, and ratified an international agreement extending protection to
satellite signals.
In March 2012, El Salvador passed a new Medicines Law to regulate the production, sale, and distribution
of pharmaceuticals. The law created the National Directorate of Medicines to oversee implementation,
including drafting new regulations and establishing price controls for the sale of pharmaceuticals. The new
regulations were published by the Directorate in December of 2012.
The Attorney Generals office and the National Civilian Police enforce trademark and intellectual rights by
conducting raids against distributors and manufacturers of pirated CDs, cassettes, clothes, and computer
software. The 2005 reforms authorize the seizure, forfeiture, and destruction of counterfeit and pirated
goods and the equipment used to produce them. They also allow authorities to initiate these raids exofficio, and piracy is now punishable by jail sentences of two to six years. However, using the criminal and
mercantile courts to seek redress of a violation of intellectual property is often a slow and frustrating
process. In 2008, the local Blockbuster Video franchise shut down, citing piracy concerns.
Judiciary and regulatory enforcement continue to be the weakest pillars of intellectual property protection
in El Salvador. A significant intellectual property rights case continues to drag on through the Salvadoran
court system, concerning a contractual dispute involving trademark and copyright infringement by an exfranchisee of McDonalds. In October 2011, the Salvadoran Supreme Court upheld a previous award of
$24 million to the ex-franchisee. McDonalds continued appeals. In October 2012, the Supreme Court again
decided in favor of the ex-franchiser and McDonalds paid an award, though further legal issues remain.
El Salvador is a signatory of the Bern Convention for the Protection of Literary and Artistic Works; the Paris
Convention for the Protection of Industrial Property; the Geneva Convention for the Protection of
Producers of Phonograms Against Unauthorized Duplication; the World Intellectual Property Organization
(WIPO) Copyright Treaty; the WIPO Performance and Phonograms Treaty; and the Rome Convention for
the Protection of Performers, Phonogram Producers, and Broadcasting Organizations.
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Infrastructure
Seaports: Acajutla, located 85 kilometers west from San Salvador, is El Salvadors only operational port.
Cutuco, located at the eastern end of El Salvador on the Gulf of Fonseca, is being rebuilt and will be El
Salvadors second port. Salvadoran importers also use Guatemalan and Honduran ports. The Autonomous
Executive Port Commission (Comision Ejecutiva Portuaria Autonoma) or CEPA, is the government agency
that operates the ports. Vessels transporting solid bulk, general cargo, flour, steel, fertilizers and fuels use
Acajutla. The government is in the process of concessionalizing Acajutlas port services to increase
efficiency and private investment. The concession will be granted for 25 years and can be extended for
10 additional years. Prospective concessionaires will have to make a minimum investment of $18 million.
The port has 3 piers, 7 landfalls, 4 warehouses and approximately 177 hectares of land.
The Port of Cutuco, closed in 1996, is being rebuilt with financing from the Japanese International
Cooperation Agency (JICA) and the Central American Bank for Economic Integration. Cutuco will consist
of three different terminals: one for containers, one multipurpose, and one for passengers. The port will
offer customs, banks, and immigration services. Port construction is expected to begin by the end of 2003.
The new port will be operational by 2006.
Airport: The International Airport of El Salvador is in Comalapa about 42 kilometers from San Salvador.
The airport, also administered by CEPA, is the hub of Central American air transportation. The passenger
terminal includes 17 parking positions, waiting rooms, commercial establishments, baggage claim area and
counters, and airlines offices. The number of passengers in 2002 was approximately 1.7 million. A smaller
airport in Ilopango, on the eastern edge of San Salvador, is currently reserved for military aviation and
private use, but is being considered for development as a regional cargo-handling center.
Railways: The National Railways of El Salvador (FENADESAL) is also administered by CEPA. Rail service,
however, was suspended in October 2002.
Telecommunications: Following a successful privatization of the sector, El Salvador has more than
709,000 installed phone lines. El Salvador is also the largest cell phone market in Central America with over
908,000 subscribers in 2002. The major international telephone services are available in El Salvador. There
are direct dialing, fax and telex facilities to most countries in the world. The official mail system is
inadequate, but there are many private courier services, such as DHL, Federal Express and UPS.
Electricity: Power distribution is entirely privatized. The wholesale generation market remains dominated
by CEL, the Salvadoran state-owned electricity company, that supplies more than half of the electricity
demand (from hydroelectric and geothermal plants). The remaining capacity is thermal, generally diesel or
bunker-fired. There is a limited capacity electric power link to Guatemala that allows for imports of power,
but grid incompatibilities currently restrict this trade. A link to the Honduras grid funded by the IDB under
the auspices of the new Central American Integration System began operation in May 2002.
Roads/Highways: The Pan-American Highway crosses the country from Guatemala to the eastern
Honduran border, connecting the main Salvadoran cities. About 60% of El Salvadors 3,300 kilometers in
roads are paved. About 2,600 kilometers of roads are being repaired and refurbished by the Fondo de
Conservacion Vial (FOVIAL), a fund created in 2001 and financed by a gasoline surcharge to maintain the
road network. From the period of 1999 to mid-2003 the Ministry of Public Works (MOP) has invested
$930 million in public infrastructure, reconstruction of bridges, and rehabilitation of main roads. Over the
next 10 years, the Government of El Salvador plans to construct a highway around San Salvador in four
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phases. The Inter-American Development Bank will provide approximately $162 million to help finance the
project.
Corruption and other Bureaucratic Obstacles

U.S. individuals and firms operating or investing in El Salvador should take the time to become familiar
with the relevant anticorruption laws in order to properly comply with them, and where appropriate, they
should seek the advice of legal counsel. U.S. companies operating in El Salvador continue to be subject to
the U.S. Foreign Corrupt Practices Act.
Corruption can be a challenge to investment in El Salvador. El Salvador ranks 83 out of 174 countries in
Transparency Internationals Corruption Perceptions 2012 Index. El Salvador has laws, regulations and
penalties to combat corruption, but their effectiveness is inconsistent. Soliciting, offering, or accepting a
bribe is a criminal act in El Salvador. The Attorney General has a special office, the Anticorruption and
Complex Crimes Unit, which handles cases involving corruption by public officials and administrators. The
Constitution also established the Court of Accounts that is charged with investigating public officials and
entities and, when necessary, passing such cases to the Attorney General for prosecution. In 2005, the
government issued a code of ethics for the executive-branch employees, including administrative
enforcement mechanisms, and it established an Ethics Tribunal in 2006.
The Legislative Assembly approved a new Transparency Law in 2011 in an effort to combat corruption and
increase government accountability. The laws intended effectiveness has been partially delayed pending
the appointment of commissioners to the Access to Public Information Institute, the newly-created entity
responsible for ensuring the laws implementation.
There have been some recent corruption scandals at the federal, legislative, and municipal levels. There
have also been credible complaints of judicial corruption. El Salvador has an active, free press that reports
on corruption.
El Salvador is not a signatory to the OECD Convention on Combating Bribery of Foreign Public Officials in
International Business Transactions. El Salvador is a signatory to the UN Anticorruption Convention and
the Organization of American States (OASs) Inter-American Convention Against Corruption.
International Agreements
Trade Agreements. In 1995, El Salvador joined the World Trade Organization. On March 1, 2006, the U.S.
Central America Dominican Republic Free Trade Agreement (CAFTA-DR) entered into force between El
Salvador and the United States. Approximately 80% of U.S. industrial and commercial goods now enter El
Salvador duty-free, with the remaining tariffs on these goods phased out over 10 years. For more
information, see the CAFTA-DR Final Text at http://www.ustr.gov/trade-agreements/free-tradeagreements/cafta-dr-dominican-republic-central-america-fta/final-text
The General Treaty for Central American Integration, signed December 13, 1960, created the Central
American Common Market (CACM). After nearly two decades of inactivity, CACM was revived in the
early 1990s. The five member countries (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua)
have agreed on maximum tariffs and harmonized 95% of tariff rates, mostly for industrial goods; but there
is no date for the establishment of a complete Central American customs union. There has been some
progress on labeling standards, but the region has yet to address other issues related to creating a customs
union, such as customs procedures, sanitary and phytosanitary standards, standards, quota management,
and intellectual property rights.
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In 1999, El Salvador, together with Guatemala, Honduras, and Nicaragua, signed free trade agreements
with the Dominican Republic and Chile. In 2002, the region concluded agreements with Panama and
Mexico. In 2007, El Salvador and Honduras signed a Free Trade Agreement with Taiwan, and the Northern
Triangle (El Salvador, Guatemala, and Honduras), signed a Free Trade Agreement with Colombia. In 2010,
Central America signed an Association Agreement with the European Union that includes the
establishment of a Free Trade Area, which is expected to enter into force in late 2012. Central America also
negotiated a FTA with Mexico which entered into force in December 2011. The Central American countries
are negotiating a free trade agreement with Canada and Peru and signed a partial scope agreement with
Cuba in 2011 which is expected to enter into force in 2012. In 2012, Central America will negotiate an FTA
with the Caribbean Community (formed by Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica,
Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the
Grenadines, Suriname, and Trinidad and Tobago). El Salvador will also negotiate an FTA with South Korea
in 2012.
The U.S. Trade Compliance Center (TCC) (http://www.trade.gov/tcc) is the gateway to the U.S.
Department of Commerces Trade Agreements Compliance Programa network of U.S. Commerce
Department and other U.S. Government resources working together to reduce or eliminate foreign trade
barriers. Upon receiving a complaint, the TCC organizes a case-management team of U.S. government
expertsincluding country, industry, and trade agreement specialists, as well as Commercial Service
officers at home and abroadto help U.S. firms facing barriers to trade in foreign markets. These experts
work with foreign governments to resolve these problems and ensure that they receive the benefits of all
U.S. trade agreements. The TCC mission is to improve market access for U.S. workers, exporters, and
investors and to seek compliance by foreign governments with U.S. trade agreements.
U.S. companies that believe they have a complaint can tap the resources of the U.S. Department of
Commerces Trade Agreements Compliance Program by submitting a trade complaint form, found online
at http://tcc.export.gov (click on Report a Barrier). The TCC web site also includes a checklist of common
trade problems, texts of over 270 trade and related agreements, Exporter Guides with brief explanations of
selected trade agreements, Market Access News, subscription to the weekly Whats New e-mail update
on trade-related news, and information on WTO standards notifications via Notify U.S.
Bilateral Investment Agreements. CAFTA-DR, the free trade agreement among Central American countries,
the Dominican Republic, and the United States entered into force for the United States and El Salvador on
March 1, 2006. CAFTA-DRs investment chapter provides protection to most categories of investment,
including enterprises, debt, concessions, contract, and intellectual property. Under the agreement, U.S.
investors enjoy, in almost all circumstances, the right to establish, acquire, and operate investments in El
Salvador on an equal footing with local investors. Among the rights afforded to U.S. investors are due
process protection and the right to receive a fair market value for property in the event of an expropriation.
Investor rights are protected under CAFTA-DR by an effective, impartial procedure for dispute settlement
that is fully transparent and open to the public.
In 2010, a new alcohol tax entered into force in El Salvador. U.S. industry has voiced concerns that the new
tax discriminates against imported alcohol, in violation of El Salvadors CAFTA-DR and WTO obligations.
The El Salvadoran government has not officially confirmed its position on whether the CAFTA-DR is a
multilateral agreement versus a bilateral agreement with the United States. In addition, U.S. firms have
raised concerns that El Salvador may not be adhering to its CAFTA-DR obligations regarding import
treatment of goods from free trade zones in other Central American countries which appear to meet
CAFTA-DR rules of origin requirements.
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El Salvador also has free trade agreements with Mexico, Dominican Republic, Chile, Panama, Colombia,
and Taiwan. All have entered into force with the exception of the FTA with Colombia which is expected to
enter soon into force. El Salvador, jointly with Costa Rica, Guatemala, Honduras, Nicaragua, and Panama,
signed an Association Agreement with the European Union that includes the establishment of a Free Trade
Area. The agreement includes provision for Central American countries and Panama to get access to a
wider range of EU development aid. The agreement was ratified on December 11, 2012 by the European
Parliament. Ratification by the Salvadoran Legislative Assembly is pending but it is expected to take place
soon and the agreement to enter into force in 2013. The five Central American Common Market countries,
which include El Salvador, have an investment treaty among themselves.
The free trade agreements that El Salvador has with Mexico, Chile, and Panama include investment
provisions. El Salvador is also negotiating trade agreements with Canada, Peru, and Belize that will contain
investment provisions. The El Salvadoran government signed a Partial Scope Agreement (PSA) with Cuba
in 2011 and is negotiating another with Ecuador.
OPIC and Other Investment Insurance Programs. The Overseas Private Investment Corporation (OPIC)
insures against currency inconvertibility, expropriation, and civil strife and can provide corporate project
financing and special financing to small business. OPIC has a bilateral agreement with El Salvador that
requires the El Salvadoran government to approve all insurance applications. A new agreement is being
negotiated that will eliminate this requirement. In 2006, OPIC signed an agreement with the El Salvadors
National Investment and Exports Promotion Agency (PROESA) to improve outreach to U.S. small business
investors in El Salvador. Because El Salvador uses the U.S. dollar, full inconvertibility insurance may be
unnecessary, but investors do insure against inability to transfer funds. El Salvador is a member of the
Multilateral Investment Guarantee Agency (MIGA).
Labor Conditions
In 2012, El Salvador had a labor force of approximately 2.6 million. Salvadoran labor is perceived as hard
working and receptive to training and advanced study. That said, the general educational level is low, and
the skilled labor pool is shallow, which may pose problems for investors needing skilled, educated labor.
According to many large employers, there is a lack of middle management-level talent, which sometimes
results in the necessity to transplant additional managers from abroad. Employers do not report laborrelated difficulties in incorporating technology into their workplaces.
The Constitution guarantees the right of employees in the private sector to organize into associations and
unions. Employers are free to hire union or non-union labor. Closed shops are illegal. Labor law is
generally in accordance with internationally recognized standards, but is not enforced consistently by
government authorities. In 2011, several businesses expressed concerns about the governments application
of labor laws, alleging a disregard of established legal procedures.
Sources: 2013 INVESTMENT CLIMATE STATEMENTEL SALVADOR, BUREAU OF ECONOMIC AND BUSINESS
AFFAIRS, US DEPARTMENT OF STATE; EL SALVADOR COUNTRY COMMERCIAL GUIDE FY 2012, US &
FOREIGN COMMERCIAL SERVICE AND US DEPARTMENT OF STATE; PRS Data files.
Page 12 1-Jan-2014

1-Jan-2014
El Salvador
Country Conditions
Background
Geography
El Salvadors southern border is on Central Americas Pacific coast. Guatemala lies to the west and
Honduras to the north and east. El Salvador also shares access to the Gulf of Fonseca with Honduras and
Nicaragua. The countrys three main regions are a southern coastal belt, the central valleys and plateaus,
and the mountains along the border with Honduras. It has a semitropical climate, few natural resources,
and some fertile lands used for growing exportable coffee.
During January, the capital, San Salvador, which is located inland, averages low temperatures of 16C, high
temperatures of 33C, and receives an average of one day of rainfall; during July, its average low and high
temperatures are 24C and 32C respectively, and it receives an average of 20 days of rainfall.
Social Conditions
Ethnic and Racial Divisions. Around 90% of the population claims a Mestizo (mixed European and
indigenous) background. Indigenous peoples account for about 1% of the total population. A few small
communities encounter no resistance to maintaining their traditional dress and customs without repression
or interference, but they live in the poorest parts of the rural countryside where unemployment is high.
Indigenous people earn less than other agricultural laborers and their opportunities for education and work
are inadequate. Many indigenous people, as well as rural poor, lack the ability to own land.
Regional and Class Divisions. For many years, access to land, labor, credit, and production was controlled
by a small group of the most affluent families. Although a small number of families are still influential,
resources and opportunities have become more diversified as international trade has become an
increasingly important component of the economy. Nonetheless, in 2012 about 35% of the population lived
below the national poverty level.
Education. Education is free and compulsory through the ninth grade, but only about 90% complete that
level. Despite efforts to improve the quality of schooling, rural schools lag behind their urban counterparts,
partly because El Salvador spends less on education than most countries in Latin America. The literacy rate
stood at only 85% in 2012.
Health. Malnutrition afflicts much of the population, especially infants and young children. The infant
mortality rate was 19 per 1,000 live births in 2012. Low levels of economic growth, along with high
population growth and unemployment, limit health care and the delivery of health services. To combat the
effects of widespread poverty, the government has several programs providing medical assistance to the
poorest residents. Despite such efforts, only 87% of the urban population and only 52% of the rural
population has access to safe water. Doctors are extremely scarce, even in urban areas.
Government
El Salvador is a democratic republic governed by a president and an 84-member unicameral Legislative
Assembly. The president is elected by universal suffrage by absolute majority vote and serves for a five-
Background
1-Jan-2014 Page 13

1-Jan-2014

year term. A second round runoff is required in the event that no candidate receives more than 50% of the
first round vote. Members of the assembly are elected based on the number of votes that their parties obtain
in each department (circumscriptive suffrage) and serve for three-year terms. The country has an
independent judiciary and Supreme Court.
Page 14 1-Jan-2014
Background
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El Salvador

Updated as of Oct 2014

2014, The PRS Group, Inc.

Political Risk Services

Reproduction without written permission of The PRS Group is strictly prohibited.

KEY ECONOMIC FORECASTS

* Indicates forecast of a new regime.

27-Oct-2014 Page U-1

Political Risk Services

El Salvador Country Update

Opinion polls suggest that the distribution of seats is unlikely to change

New President Already Encountering Headwinds

Page U-2 27-Oct-2014

Political Risk Services

El Salvador Country Update

27-Oct-2014 Page U-3

Political Risk Services

El Salvador Country Update

through the Millennium Challenge Corporation, which Washington has

Political Risk Services

El Salvador Country Update

Reproduction without written permission of The PRS Group is strictly prohibited.

27-Oct-2014 Page U-5

2014, The PRS Group, Inc.

El Salvador Country Forecast

Political Risk Services

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Neuva San Salvador

North Pacific Ocean

Political Risk Services

Reproduction without written permission of The PRS Group is strictly prohibited.

KEY ECONOMIC FORECASTS

* Indicates forecast of a new regime.

Narrow Win Will Reinforce Polarization

Political Risk Services

El Salvador Country Forecast

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Lack of Investment Will Weigh on Growth

Economic Forecasts for the Three Alternative Regimes

Political Risk Services

El Salvador Country Forecast

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Political Fact Sheet

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Political Risk Services

Domestic Economic Indicators

International Economic Indicators

Note: *value of local currency measured against the euro

27-Oct-2014 ~ Page 6-7

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Political Risk Services

Domestic Economic Indicators

International Economic Indicators

Note: *value of local currency measured against the euro

27-Oct-2014 ~ Page 6-7

El Salvador Country Forecast

Regional Inflation Rates (2013): N&C America

El Salvador Country Forecast

Trinidad & Tobago

Economic Performance Profile

Real GDP Growth (%)

Debt Service Ratio