Santander highlights the growth of economy, Bukele says little by little

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By LatAm Reports Editorial Team

In an analysis, the bank highlighted more than expected economic growth and a rebound in foreign investment; however, it warns of persistent fiscal weaknesses.

The Spanish bank Santander highlighted the transformation of the Salvadoran economy, while warning of fiscal weaknesses.

In a report it was posted on social media by President Nayib Bukele, with the phrase “gradually, then suddenly.” The bank’s publication indicates that, in 2023, according to official figures, there was higher-than-expected economic growth in the face of the historical trend that remained at 2 %.

Last week, the Central Reserve Bank (BCR) rose from an initially estimated 2.7 % to 3.5 per cent the growth of the Gross Domestic Product (GDP) of 2023, attributed to the performance of fourth-quarter economic activity, which rebounded by 4.5 per cent.

According to the head of the institution, Douglas Rodriguez, this dynamic was due to the realization of the Miss Universe beauty contest, the Christmas holidays, the reopening of the Port of the Devil and the entry into operations of El Chaparral. However, this has generated doubts among economists, as 2023 closed with a sharp drop of 8.7% in exports and manufacturing accumulates seven quarters in contraction.

Santander points out that family remittances are the main source of entry, with a contribution of 24 % of Gross Domestic Product, after reaching historical levels after the covid-19 pandemic.

However, GDP growth of 3.5 per cent higher than expected in 2023 did not translate into fiscal consolidation with a larger fiscal deficit, including and excluding the pension deficit last year, he added in his report.

The gradual trajectory of tourism and inflows of foreign direct investment (FDI) were not sufficient to reduce the fiscal deficit, reopen access to the bond market and expand domestic financing capacity.

The bank notes that relations with the International Monetary Fund (IMF) are essential for expanding access to external credit and ensuring a short-term fiscal consolidation plan.

Look at the macroeconomic and fiscal situation

The current account deficit increased from 6.8 per cent in 2022 to 1.4 per cent in 2023 due to the decrease in imports and the increase in tourism. Santander points out that the tourism industry reported record levels at the end of last year at more than $2.7 billion, almost triple the number of tickets in 2014-2020.

Tourist flows were the likely catalyst for double-digit growth in sectors such as construction (17.9 per cent year-on-year) and entertainment (10.2 per cent year-on-year), the bank said, although it warned that there are still no significant inflows for high-tech activity.

The lower capital account surplus mainly reflects restricted access to external indebtedness. Financial inflows remain fairly low, without access to bond markets for a net repayment cycle. The other investment category (mainly loans) continues to slow with lower net inflows. This was offset by an acceleration of FDI, he said.

FDI rose from 0.5 per cent of GDP in 2022 to 2.2 per cent of GDP 2023 which, according to the RCB, is due to the fact that companies are reinvesting their profits. Santander recalls that this rate remains below 3 percent of GDP between 2017 and 2018, or 4.5 percent of the rest of the Central American economies.