Monday, July 06, 2009

Declining remittances threaten El Salvador's economy

The table below shows the amount of remittance money sent into El Salvador by Salvadorans living abroad for the first 5 months of this year compared to the same period in 2008:



Month 2008 2009 % change
Jan $275.5 $252.4 -8.4%
Feb $298.3 $275.1 -7.8%
Mar $338.4 $315.8 -6.7%
Apr $338.5 $292.5 -13.6%
May $353.4 $308.2 -12.8%
Source: El Salvador Central Reserve Bank statistics in millions of US dollars.

The decline in remittances, which make up 1/6th of El Salvador's economy, is one factor leading rating agencies to downgrade El Salvador's public debt according to the WSJ:

Fitch Ratings cut El Salvador's long-term ratings one notch deeper into junk territory, saying that nation's economy is expected to shrink 2.5% this year.

The move to BB matches the one handed out last month by Standard & Poor's Ratings Service. Fitch lowered its ratings outlook on the country to negative in October, where is remains even after the downgrade, meaning further cuts aren't out of the question.

Like many countries, El Salvador's deficit and debt are expected to increase this year. Financing needs for 2010, said Fitch, depends on the nation's fiscal prudence, being able to maintain domestic investor confidence and continued multilateral support. In 2011, El Salvador could require international aid, especially with a $650 million Eurobond maturing then.

Political and economic uncertainty in El Salvador have led to delays in potential investments, hurting growth prospects, and the country is starting from a worse economic position than others with the same ratings, Fitch noted. However, the financial system was resilient during the recent pre-electoral period and "notably smooth political transition," the firm added.

Leftist Mauricio Funes was elected president in March, but he has said he doesn't plan to turn the country away from closer ties to the U.S., where more than two million Salvadoran expatriates live.

Casey Reckman, associate director in Fitch's sovereign group, said reductions in money sent into the nation and reduced demand have "demonstrated El Salvador's vulnerability to the U.S. downturn."

As I look at the statistics, forecasting a 2.5% downturn in El Salvador is a pretty safe bet, when the decline in remittances is already at 10% for the first five months (or $160 million of lost income in the pockets of Salvadoran families) and trending higher.

5 comments:

Otto Rock said...

Trying to find some solace in the numbers, Tim. There isn't much, sad to say. That -2.5% GDP forecast is optimistic, even.

Country inflation has slowed (i saw +0.1% for May) which is to be expected. Deflation is a threat, but maybe not as much in a country that has less threat of housing deliquency on mortgages and food-on-plate supply is less threatened by salary deflation.

But that's the few specks of silver lining in a dark cloud. In the longer term, repatriation adds to in-country GDP, of course.

Gatofilo said...

Although El Salvador has over the years maintained an excellent Credit Ratings that has been key to its historically stable and dynamic economic growth, the Fitch Ratings Banks Group presently Downgrades El Salvador's Ratings to 'BB'; and with Outlook Negative.

It's important to realize that as of June 18, 2009, Fitch Ratings downgraded El Salvador's long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BB' from 'BB+', and the Outlook on these ratings is Negative. Fitch has affirmed El Salvador's short-term IDR of 'B' and the Country Ceiling of 'BBB-'.

The rating downgrade and Negative Outlook reflect a structural shift in the country's fiscal and growth trajectory. Fitch expects El Salvador's economy to contract by -2.5% in 2009, with downside risks. Moreover, optimism regarding El Salvador's growth prospects has diminished as potential investments have been postponed due to political and economic uncertainty. This will weigh on El Salvador's macroeconomic outlook over Fitch's rating horizon with 0% GDP growth forecast for 2010 and 1% in 2011.

'The sharp economic impact of declining remittances, reduced external demand and weaker FDI prospects has demonstrated El Salvador's vulnerability to the U.S. downturn,' said Casey Reckman, Associate Director in Fitch's Sovereign Group.

A considerable revenue shock owing to economic recession will combine with continued spending pressures to result in a fiscal deficit of over 5% of GDP in 2009. While the majority of countries in the 'BB' category will experience growing deficits and larger debt burdens during the current global downturn, El Salvador's starting position is weaker than most. In addition, at 38% of GDP in 2008, non-financial public sector debt approaches the 10-year 'BB' category median of 42%. However, given the limited policy flexibility afforded by dollarization and narrowness of the economy, Fitch would prefer these indicators be stronger than category medians.

A weak macroeconomic outlook along with fiscal deficits around 5% of GDP over the forecast period places the sovereign's debt dynamics on a deteriorating trajectory unless measures are enacted to boost revenues and contain expenditure,' Reckman said. Fitch forecasts gross and net non-financial public sector debt to increase to 52% and 50% of GDP, respectively, by 2011. Moreover, non-financial public sector debt as a proportion of revenue already compares poorly with the 'BB' median over the last 10 years and is expected to increase to 346% by 2011 from 208% in 2008.

Greater multilateral support and some easing of domestic financing constraints should allow the sovereign to meet its 2009 financing needs. However, the 2010 financing picture remains dependent on fiscal prudence, maintenance of domestic investor confidence and continued multilateral support. Beyond 2010, renewed access to international capital markets could become necessary for meeting heftier financing needs, including the US$650 million Eurobond maturing in 2011. President Mauricio Funes and his party will require continued cooperation from opposition assembly members to garner the 2/3 majority approval for additional long-term borrowing in support of its financing needs.

And continues below....

Gatofilo said...

As I was saying...

Monetary stability underpinned by official dollarization, a good track record on structural reforms and a relatively solid financial sector support El Salvador's ratings. Despite political and economic stress, the financial system remained resilient throughout the recent pre-electoral period and notably smooth political transition.

Sustained fiscal slippage, a more difficult financing outlook and resurgent political gridlock could reinforce downward pressure on El Salvador's sovereign ratings. On the other hand, stronger growth, fiscal consolidation and easing of financing constraints could help uphold El Salvador's sovereign creditworthiness.

It is essential for the nation, that the people of El Salvador together with their democratic government and the business community work together to overcome this economic downturn that will undoubtedly affect the entire country.

In unity there is strength, but divided they will fall.

john said...

Should we thank the above poster for repeating Wall Streets view of the prospects for making a financial killing in El Salvador?

For contrast's sake, why not post verbatim the UNDP's assessment of the continued growth of inequality in "El Pais del Corazon."

Of course the UNDP calls for rebuilding structural reforms (health care, education,...) that the Wall Street types call for dismantling through the IMF and World Bank imposed Structural Adjustment Programs (SAP). This "structural violence" in the liberation theology language is the sort of reform the Wall Street types and the above poster apparently support: further immiseration of the 75% in the so-called "informal economy."

Gatofilo said...
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