Declining remittances threaten El Salvador's economy
Source: El Salvador Central Reserve Bank statistics in millions of US dollars.
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%
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:
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.
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."