Event

Current vice-president Salvador Sánchez Cerén of the left-of-centre FMLN party (Frente Farabundo Martí para la Liberación Nacional) won the second round of the presidential elections by the narrowest of margins. In a run-off poll held on 9 March, he secured 50.1% support and thus prevailed over the candidate for the conservative ARENA party (Alianza Republicana Nacionalista), San Salvador mayor Norman Quijano. Though Quijano initially refused to admit defeat (claiming fraud, questioning the impartiality of the electoral tribunal and calling for the election to be annulled), he was eventually forced to do so following the Supreme Court's decision against a vote-by-vote recount.

Impact on country risk

The tight poll outcome illustrates the political polarisation that still characterises El Salvador more than two decades after the end of the civil war in 1992 (the FMLN consisted of a coalition of guerrilla organizations, ARENA ruled from 1989 until 2009). Yet like the peaceful transition to FMLN rule in 2009, the respect for this election outcome (barring further ARENA challenges) marks a significant step towards democratic consolidation. Moreover, despite being a former guerrilla fighter, Cerén campaigned on a centrist agenda and he will need to seek consensus given the lack of an FMLN majority in the fragmented Congress. A main concern will be dealing with youth gang-related insecurity. While a government sponsored truce, signed in March 2012, brought down the murder rate significantly, in recent months violence and extortion have been on the increase again. On the economic front, the president-elect is expected to continue the pro-business policies of incumbent Mauricio Funes. The difficult challenge will be to attempt at fiscal consolidation while supporting growth. Public finances derailed as of 2011, since the authorities failed to scale back on expansionary policies applied during the 2009-10 crisis years. Low tax revenues and expensive subsidy programs have thus made for a further increase in public debt. As for growth, El Salvador has trailed behind its Central American peers due to low savings and investment rates. Inadequate levels of human capital, infrastructure gaps and the dysfunctional institutional framework undermine competitiveness. On the upside, El Salvador stands to benefit from the recovery of the US economy in terms of export and remittance earnings, and inflation (expectations) will be kept in check owing to the dollarization of the economy in place since 2001.

Analyst: Sebastian Vanderlinden, s.vanderlinden@credendogroup.com