Saturday, September 27, 2008

The US sneezes and El Salvador catches a cold

The growing financial crisis in the US could have major negative ramifications for El Salvador. "We are in the presence of a big hurricane and we don't know whether it will grow to a Category 5 or whether it will end as just a tropical storm" said economic analyst Carlos Acevedo in La Prensa Grafica. As the banking and finance centers throughout the world are in turmoil, it is worth remembering that all the major banks in El Salvador are foreign-owned.

A direct effect of the economic slowdown in the US may be a decline in remittances from Salvadorans in the US back to their families. Statistics from the Central Reserve Bank of El Salvador are beginning to show remittances dropping off. Remittances have fallen for three straight months from the previous month, and remittances in August 2008 were lower ($305.7M versus $312.2M) then in August 2007. Since remittances make up more than a sixth of El Salvador's economy, any slowdown of remittances could be a problem for the country.

Meanwhile, foreign trade and markets have a a definit impact as well. In one negative sign, Hanesbrands, Inc., maker of Hanes, Champion and Playtex brands of clothing, announced the closing of an El Salvador sewing factory which will mean the loss of 2600 jobs. Hanesbrands is closing facilities in Central America in favor of factories in southeast Asia where labor costs are lower. I've also been told by a reader of the blog that Dell may be closing its call center in El Salvador.

The US agriculture department released figures on the impact in the agricultural sector of DR-CAFTA, the free trade agreement between Central American nations and the US. For El Salvador, there was an increase in both imports and exports:

Trade with El Salvador: Total two-way trade of agricultural products in 2007 was $524 million, up 25 percent from 2006. U.S. exports to El Salvador reached more than $343 million, with record sales in tree nuts, corn, rice, snack foods, and feed and fodder. U.S. imports from El Salvador were more than $180 million, of which snack foods, fresh vegetables, and sugars, sweeteners, and beverage bases hit some of their highest levels.


inner-self said...

i think it is obvious now why dollarization doesn't make sense; see the US fed reserve had been pumping cash money into its economy and lowering the interest rates since what one or two years ago? just to keep the economy from deaccelarting growth wise. in el salvador that can't be done because it doesn't have its own currency to print out and issue or inject into the most vulnerable sectors of the economy. if i were president i would seriously reconsider introducing a national currency, i would even change it's name from colon to something else for a change, but seriously, set its value at 10 units to the dollar unit, fixed. that doesn't mean for the govt. to go on a rampage printing money till it becomes worthless, but it could inject a few tens of millions here and there in areas that need it the most, such as food and energy production. and of course, wouldn't be nice to lower the interest rates in el salvador, i mean, wasn't that the original soundtrack used to distort people's evident discontent? in my opinions, interest rates in el salvador are still way to high for the average person to feel credit is really a good option for them.

Salva_alchemist said...

The country can not revert back to its own currency right now. But yes, it was absurd from the very beginning to dollarize the country. If the US banking industry is going through this kind of crisis just imagine the ramifications it will have in ES. The loans given to people in El Salvador who have been paying them with remittances and other loans taken out to people who shouldn't have taken one out in the first place.

The only way I see the country going back to its own currency is if the US heads into a deep depression. By then the economy will be so screwed up anyway, it wont have much of an affect reverting back to its own currency. There wont be anything to lose reverting back like so many proponents have suggested up until now. If such situation does happen, an I really hope it doesn't, it should teach these greedy investors why it doesn't work to have your economy based on a foreign currency. You can have it pegged, but not directly backed by it.

This crisis could be huge, and I really hope this buyout works, or else I wont have much of anything to look forward once I graduate from college.

Anonymous said...

I see now that banco cuscatlan was bought out by citigroup? how long ago did that happen/?

Anonymous said...

The problem with this metaphor is that the Salvadoran economy was in the ICU BEFORE the U.S. sneezed. It's more like, "the US sneezes and El Salvador has a heart attack."

Tim said...

Citigroup agreed to buy Banco Cuscatlan in December 2006

Anonymous said...

It's more like, "the US sneezes and El Salvador has a heart attack."

That bad huh.