El Salvador’s Presidential Swing Swathe
US President Obama ended a brief Latin Americatour with a visit to El Salvadoran counterpart Funes, who won the post as standard-bearer for the rebel FMLN party in a post-civil war precedent, as investors awaited refinancing signals for a $650 million Eurobond maturing in the second half. In advance of the meeting the IMF completed another review of the precautionary standby that succeeded the 2008 crisis arrangement, which predicted 2.5 percent economic growth and a 3.5 percent of GDP budget deficit which could bring overall public debt toward the 50 percent level. With dollarization, inflation will mirror the US 1-2 percent result and the current account gap should come in at 3 percent of output on offsetting effects from higher remittances and oil import charges. Energy subsidies are a major fiscal drain to be reformed under the program that also targets a wider tax base. Banking stress tests show that the system could absorb another recession as a unified financial services regulator is put in place. Capital markets should benefit from a new investment funds law governing accounting and valuation, and state-owned lenders are to be converted into commercial and development institutions to ensure future viability. Business climate improvement is a key priority with sub-regional outperformance by several measures in World Bank rankings countered by poor education and security scores. As external sovereign issuance is again prepared it should conform to a comprehensive debt management strategy that is still lacking, the Fund advised.
Guatemalatoo as an occasional bond sponsor resorted to a standby, and should see 2.5 percent GDP growth this year after overcoming consecutive natural calamities. Presidential elections are due in the coming months as budget arrears are cleared and foreign reserves recover to $5 billion on FDI pickup. VAT introduction should help bridge the 3 percent of output deficit, and tighter monetary policy should support the currency and address 5-percent range food-driven inflation. In the financial sector, insurance is to get a fresh regime while banks are fully provisioning bad loans. Elsewhere in Central America Honduras just received IMF credit after a new government took office following the controversial ouster of its predecessor and committed to fiscal overhaul including changes in public companies and pension funds. Production and credit should rebound from the interruption, when a single chief of state could not be recognized, and bilateral and multilateral assistance has been restored from other sources including the Inter-American Development Bank and Taiwan. Banks have advocated for a revised secured transaction law as the isthmus tries to reverse the historic tendency to spurn the broader concept.
