## _cr0971

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---

### Background and recent performance
- Macroeconomic fundamentals described as solid and improved in recent years, with fiscal consolidation reducing the public debt-to-GDP ratio and high growth in 2006–07.
- Political context: congressional split and election cycle (congressional/municipal elections slated for January 2009 and presidential election slated for March 2009; if no candidate attains 50 percent a run-off in mid-April; new government assumes office on June 1, 2009) may increase polarization and delay important legislation, including authorization of government borrowing.
- 2008 macro performance:
  - Real GDP growth projected to slow to 3.2 percent in 2008 (compared to 4.7 percent in 2007).
  - Twelve-month inflation slowed from almost 10 percent in August to 5.5 percent by year-end 2008.
  - External current account deficit projected at 6 percent of GDP in 2008, fully financed by net capital inflows.

### Financial sector soundness, behavior, and policy measures
- Banking system indicators (Financial Soundness Indicators; source: Superintendency of the Financial System):
  - Capital Adequacy: Regulatory capital to risk-weighted assets — Average 13.4; Dec. 2007 13.8; Jun. 2008 14.5; Nov. 2008 14.6
  - Asset Quality and Provisioning: NPLs to gross loans — Average 2.3; Dec. 2007 2.1; Jun. 2008 2.3; Nov. 2008 3.1
  - Total provision to NPLs — Average 126.3; Dec. 2007 120.0; Jun. 2008 113.3; Nov. 2008 100.1
  - Profitability: Return over average assets — Average 1.2; Dec. 2007 1.2; Jun. 2008 1.4; Nov. 2008 1.0
  - Return over average equity — Average 12.2; Dec. 2007 11.3; Jun. 2008 13.3; Nov. 2008 8.8
  - Liquidity: Liquid assets to deposits — Average 46.7; Dec. 2007 39.9; Jun. 2008 40.1; Nov. 2008 42.3
  - Leverage: Loans in percent of deposits — Average 96.1; Dec. 2007 97.4; Jun. 2008 102.2; Nov. 2008 103.5
- Additional indicators and behavior:
  - Banks maintained a liquidity ratio of about 42 percent as of end-November 2008 (of which more than half were held in highly liquid assets).
  - Capital adequacy about 14½ percent—both indicators comfortably above prudential requirements.
  - Nonperforming loans have increased and profitability is declining.
  - Share of foreign-owned bank assets is now above 90 percent.
  - With deposit growth stalling, banks turned to debt issuance to fund lending; banks raised deposit rates above those prevailing abroad.
- Policy measures to strengthen resilience:
  - Late June increase in liquid asset requirements by 3 percentage points to 6 percent (total prudential requirements—reserve and liquidity—now amount to 28 percent of deposits, effectively).
  - Banks required to submit contingency liquidity plans to the Superintendency of the Financial System (SSF), including availability of foreign credit lines.
  - SSF and central bank upgraded monitoring capabilities to follow key banking indicators daily.
  - Central bank will use a US$400 million loan from the IADB to purchase high quality loans from banks to sustain credit growth to the private sector.

### Outlook and macro policy for 2009
- Macroeconomic projections and risks:
  - Economic growth in 2009 projected to slow to 2½ percent; risks tilted to the downside.
  - Exports increased by some 17 percent over the previous year in 2008, bolstered by CAFTA-DR implementation.
  - Remittance growth has decelerated sharply in recent months and expected to remain low throughout 2009.
  - Domestic demand expected to contract due to tight financial conditions and remittance stagnation.
  - Inflation projected to fall to 3¾ percent in 2009.
  - Current account deficit projected to narrow to 2¾ percent of GDP in 2009.
- Fiscal stance and measures:
  - Overall public sector deficit in 2008 projected to reach 2.9 percent of GDP, one percentage point higher than in 2007.
  - Authorities revised fiscal deficit target for 2009 to 2.8 percent of GDP—0.4 percentage points above earlier target—explained by higher capital expenditure on social infrastructure financed with MDB loans.
  - Tax revenue base noted as low at 13.2 percent of GDP, relying heavily on ad-valorem taxes with a tax elasticity close to one; automatic stabilizers not very strong.
  - Revenue administration measures expected to yield some 0.2 percent of GDP, including modernizing customs administration and border procedures, strengthening collection procedures on tax arrears, and improving tax auditing and enforcement.
  - Considering elimination of certain tax exemptions, including on nontraditional exports.
  - On expenditure, plan to fully eliminate the remaining nonresidential subsidy on electricity and create fiscal space to increase social spending; authorities expect to generate space of up to 0.3 percent of GDP for expanding Red Solidaria and targeted health, education, and storm-mitigation programs.
- MDB financing and public liquidity:
  - Loans comprise a US$400 million financial sector loan from the IADB plus loans to the central government totaling US$950 million to be disbursed over three years.
  - Part of the US$950 million will be used to amortize a US$650 million Eurobond balloon payment maturing in 2011; remainder allocated to investment and social programs.
  - Since March 2008, the government faced difficulties placing domestic debt with maturities beyond the presidential election of March 2009; recently forged consensus to authorize borrowing from two MDBs.

### Stand-By Arrangement (SBA) — objectives, access, and phasing
- Objectives of a Fund SBA:
  - Signal policy continuity amid electoral uncertainty.
  - Help sustain investor confidence.
  - Boost economy’s resilience to shocks and strengthen financial sector liquidity buffers.
- Access and phasing (requested):
  - Arrangement length requested: 15-month SBA with access of SDR 513.9 million (300 percent of quota).
  - Phasing and purchases:
    - January 2009 (approval): SDR 342.6 million (200 percent of quota) — first purchase.
    - May 2009: SDR 42.8 million (25 percent of quota).
    - September 2009: SDR 42.8 million (25 percent of quota).
    - December 2009: SDR 42.8 million (25 percent of quota).
    - March 2010: SDR 42.8 million (25 percent of quota).
  - Total: SDR 513.9 million (300 percent of quota).
  - Staff considers initial access of about US$530 million (200 percent of quota) would provide a reasonable increase in the country’s liquidity buffer.
- Program treated as precautionary; purchases beyond approval dependent on quarterly reviews.

### Exceptional access rationale, Box 1 and Box 2 highlights
- Box 1 — Adequate access rationale (key figures):
  - Free reserves of the central bank amount to only US$136 million.
  - Historical episode: 2004 presidential elections saw system-wide deposit outflows of about 3 percent of deposits; some banks lost up to 28 percent of their deposits.
  - Metrics suggesting liquidity buffer of about US$800 million, or 300 percent of El Salvador’s quota:
    - A 5 percent deposit withdrawal and a 50 percent rollover of short-term external credit lines would jointly generate liquidity needs of close to US$800 million.
    - Central bank practice of covering about 10 percent of total deposits would amount to about US$870 million for El Salvador.
    - Total bank capital amounts to US$1.2 billion; with a recently approved financial sector loan from the IADB for US$400 million, access to about US$800 million from the Fund would give central bank access to resources roughly equal to total bank capital.
  - Conclusion: Speed of potential deposit outflows suggests need for significant frontloading.
- Box 2 — Exceptional Access Criteria (staff evaluation):
  - Total proposed access equals SDR 513.9 (US$795 million, 300 percent of quota); only annual access would exceed normal limit while cumulative 300 percent is within normal limits.
  - Criterion 1 — exceptional balance of payments pressures on the capital account: Not met (pressures have not yet materialized); program treated as precautionary. Significant risk exists that deposit withdrawals and capital outflows could materialize.
  - Criterion 2 — sustainable debt position: Preliminary staff calculations indicate debt will remain sustainable absent extremely large deposit withdrawals; public debt relatively low, at 40 percent of GDP. Drawdown of full SBA and pre-emptive MDB borrowing would increase debt-to-GDP in 2009, but under baseline prudent policies the ratio would decline to about 35 percent in the medium term.
  - Criterion 3 — access to private capital markets: Currently limited access for private sector and government, but good prospects of regaining access as global crisis eases and election uncertainty is resolved. Ratings: Moody’s investment grade; S&P and Fitch one notch below investment grade.
  - Criterion 4 — strong policy reforms and implementation capacity: Adherence to dollarization since 2001 implies a good track record and confidence in authorities’ capacity to implement the program.

### Program conditionality, monitoring, and safeguards
- Prior action:
  - Adopt regulation to enhance functioning of interbank market, making central bank a clearing house for interbank transactions.
- Quantitative performance criteria:
  - Quarterly ceilings on the deficit of the nonfinancial public sector resulting in a deficit of 2.8 percent of GDP for 2009 (quarterly targets), with an adjuster.
  - Zero ceiling on accumulation of net external payments arrears.
- Structural benchmarks:
  - Maintain reserve requirements on banks at current levels (about 22 percent).
  - Approval by congress of bill to further strengthen financial supervision.
  - Fund technical assistance to be provided; some TA recommendations could become structural benchmarks after first review.
- Consultation clause and trigger:
  - Program contains clause triggered if sum of total deposits in commercial banks plus external short-term bank liabilities of commercial banks with original maturity up to one year falls by 10 percent with respect to level at end–November 2008.
  - Under clause, authorities commit to consult with Fund staff and reach understandings on corrective measures for consideration by the Fund at the next scheduled review.
- Adjuster detail:
  - The adjuster could be for a maximum of US$50 million (0.2 percent of GDP) if additional resources from external multilateral or official bilateral creditors become available.
- Safeguards and reporting:
  - Updated safeguards assessment of the central bank initiated and to be completed no later than the first review.
  - Central bank continues to comply with key safeguards requirements, including publishing IFRS-based financial statements externally audited in accordance with international standards.
  - Authorities will provide, on a daily basis, bank-level data on total deposits and liquidity position; weekly bank-level data on outstanding short-term external liabilities.

### Capacity to repay the Fund and medium-term policy requirements
- Assessment: Capacity to repay is strong.
- Supporting factors:
  - Government commitment to macroeconomic stability and prudent fiscal policies.
  - Public debt relatively low (about 40 percent of GDP).
  - Medium-term growth prospects good; El Salvador positioned to return to high growth path when global growth rebounds, benefiting from trade agreements (including CAFTA-DR and potential Association Agreement with the European Union).
- Policy requirements for medium term:
  - Raise the primary surplus of the public sector by about 1¾ percent of GDP between 2010 and 2014 through tax measures and reductions in nonpriority spending.
  - Strengthen tax administration: streamline tax incentives (including on nontraditional exports), modernize customs, strengthen collection procedures on tax arrears, improve tax auditing and enforcement.
  - Expenditure-side savings through improved efficiency and targeting of public spending (e.g., energy and transportation subsidies).

### Risks, contingency planning, and monitoring triggers
- Key risks identified:
  - External: U.S. recession impacts via remittances, trade, and capital flows.
  - Financial: electoral uncertainty could trigger capital and deposit outflows; limited central bank ability to provide liquidity under dollarization; concentrated foreign bank ownership creates cross-border linkages vulnerability.
  - Fiscal: constrained fiscal space, low tax revenue base (13.2 percent of GDP), and reliance on MDB financing.
- Contingency and monitoring:
  - If stress triggers the consultation clause, authorities (in consultation with the Fund) would design additional policy actions to strengthen the external position and enhance prospects of fulfilling financial obligations.
  - Daily and weekly bank-level reporting to the Fund to monitor deposits, liquidity, and short-term external liabilities.

### IMF staff recommendation and Executive Board decision
- Staff recommendation:
  - "In light of these considerations, staff recommends the approval of the requested SBA."
- IMF decision:
  - Executive Board approved a 14½ month SDR 513.9 million (about US$800 million) precautionary Stand-By Arrangement for El Salvador (Press Release No. 09/10; January 16, 2009).
  - Salvadorian authorities do not intend to draw on the funds; arrangement aims to strengthen financial defenses, provide adequate liquidity, and reduce risks from global financial turmoil, the U.S. recession, and electoral uncertainties.
  - Complementary financing: loans negotiated with the World Bank and the Inter-American Development Bank for a total of US$950 million.

### Key numerical indicators and selected statistics (as reported)
- Fund quota for El Salvador: SDR 171.3 million (about US$258.8 million).
- Approved SBA: SDR 513.9 million (about US$800 million); access level: 300 percent of quota.
- Initial proposed purchase: 200 percent of quota (SDR 342.6 million, US$530.28 million).
- Potential Fund support (300% of quota): 9.3 percent of deposits (memo presentation).
- Free net international reserves (end–November): US$136 million.
- Banking system:
  - Liquidity ratio: about 42 percent.
  - Capital adequacy: 14.5 percent.
  - Total private sector deposits (end-November): 8,536 (million U.S. dollars).
  - Most liquid holdings (end-November): 2,110 (million U.S. dollars).
  - Potential Fund support (300% of quota): 795 (million U.S. dollars).
- Macroeconomics:
  - Real GDP growth: 3.2 percent in 2008; projected 2½ percent in 2009.
  - Inflation: 5.5 percent (year-end 2008); projected 3¾ percent in 2009.
  - External current account deficit: 6 percent of GDP in 2008; projected 2¾ percent of GDP in 2009.
  - Remittances from the U.S.: about 18 percent of GDP.
- Public finances:
  - Overall public sector deficit projected 2008: 2.9 percent of GDP.
  - Nonfinancial public sector deficit ceiling for 2009: not exceeding 2.8 percent of GDP.
  - Tax revenue base: 13.2 percent of GDP.
  - Expected revenue administration yield: 0.2 percent of GDP.
  - Planned fiscal space from subsidy elimination: up to 0.3 percent of GDP for social programs.
- Fund exposure and Fund metrics (selected):
  - One-year Forward Commitment Capacity (FCC) (as of end-December, 2008): SDR 97,603.9; proposed arrangement would reduce FCC by SDR 513.9 million.
  - Fund GRA credit outstanding to El Salvador (SDR): Jan-2009 342.6; 2009 471.1; 2010 513.9; 2011 513.9; 2012 369.4; 2013 117.8; 2014 5.4
  - GRA debt service to the Fund (percent of exports of goods and services): 2012 3.0; 2013 4.6.
  - Charges on GRA obligations would exceed SDR 10 million in each of the years 2010 to 2012.
  - Total deposits at end-December: US$8,815 million.
  - Sovereign spreads: fallen by 100 basis points since end-2008; regional composite declined by 30 basis points.
  - Central bank IADB loan for liquidity purchases: US$400 million.
  - Complementary MDB loans to central government: US$950 million; portion to amortize US$650 million Eurobond maturing in 2011.

*Source: _cr0971 - IMF staff report and associated statements contained in the provided content unit.*

### 1.  Selected Economic and Social Indicators ...........................................................................1

### _cr0971 - 1.  Selected Economic and Social Indicators ...........................................................................1

### Background and recent performance
- Macroeconomic fundamentals are described as solid and improved in recent years, with fiscal consolidation reducing the public debt-to-GDP ratio and high growth in 2006–07.
- Political context: congressional split and election cycle (congressional/municipal elections slated for January 2009 and presidential election slated for March 2009; if no candidate attains 50 percent a run-off in mid-April; new government assumes office on June 1, 2009) may increase polarization and delay important legislation, including authorization of government borrowing.
- 2008 macro performance:
  - Real GDP growth projected to slow to 3.2 percent in 2008 (compared to 4.7 percent in 2007).
  - Twelve-month inflation slowed from almost 10 percent in August to 5.5 percent by year-end 2008.
  - External current account deficit projected at 6 percent of GDP in 2008, fully financed by net capital inflows.

### Financial sector soundness and risks
- Banking system summary (Financial Soundness Indicators; source: Superintendency of the Financial System):
  - Capital Adequacy: Regulatory capital to risk-weighted assets — Average 13.4; Dec. 2007 13.8; Jun. 2008 14.5; Nov. 2008 14.6
  - Asset Quality and Provisioning: NPLs to gross loans — Average 2.3; Dec. 2007 2.1; Jun. 2008 2.3; Nov. 2008 3.1
  - Total provision to NPLs — Average 126.3; Dec. 2007 120.0; Jun. 2008 113.3; Nov. 2008 100.1
  - Profitability: Return over average assets — Average 1.2; Dec. 2007 1.2; Jun. 2008 1.4; Nov. 2008 1.0
  - Return over average equity — Average 12.2; Dec. 2007 11.3; Jun. 2008 13.3; Nov. 2008 8.8
  - Liquidity: Liquid assets to deposits — Average 46.7; Dec. 2007 39.9; Jun. 2008 40.1; Nov. 2008 42.3
  - Leverage: Loans in percent of deposits — Average 96.1; Dec. 2007 97.4; Jun. 2008 102.2; Nov. 2008 103.5
- Additional indicators:
  - Banks maintained a liquidity ratio of about 42 percent as of end-November 2008 (of which more than half were held in highly liquid assets).
  - Capital adequacy about 14½ percent, both indicators comfortably above prudential requirements.
  - Nonperforming loans have increased and profitability is declining.
  - Share of foreign-owned bank assets is now above 90 percent.
- Banking behavior and funding:
  - Banks raised deposit rates above those prevailing abroad (six-month U.S. dollar deposit rates comparison shown).
  - With deposit growth stalling, banks have turned to debt issuance to fund lending (y/y percent change in deposits, credit, debt issuance).
  - Banks instructed in some cases not to increase exposure; external credit lines broadly unchanged.
- Policy measures to strengthen resilience:
  - Late June increase in liquid asset requirements by 3 percentage points to 6 percent (total prudential requirements—reserve and liquidity—now amount to 28 percent of deposits, effectively).
  - Banks required to submit contingency liquidity plans to the Superintendency of the Financial System (SSF), including availability of foreign credit lines.
  - SSF and central bank upgraded monitoring capabilities to follow key banking indicators daily.
  - Central bank will use a US$400 million loan from the IADB to purchase high quality loans from banks to sustain credit growth to the private sector.

### Outlook and macro policy for 2009
- Macroeconomic projections and risks:
  - Economic growth in 2009 projected to slow to 2½ percent; risks tilted to the downside.
  - Exports increased by some 17 percent over the previous year in 2008, bolstered by CAFTA-DR implementation.
  - Remittance growth has decelerated sharply in recent months and expected to remain low throughout 2009.
  - Domestic demand expected to contract due to tight financial conditions and remittance stagnation.
  - Inflation projected to fall to 3¾ percent in 2009.
  - Current account deficit projected to narrow to 2¾ percent of GDP in 2009.
- Fiscal stance and measures:
  - Overall public sector deficit in 2008 projected to reach 2.9 percent of GDP, one percentage point higher than in 2007.
  - Sovereign ratings: investment grade by Moody’s; one notch below investment grade by S&P and Fitch with recent outlooks revised to negative.
  - Authorities revised fiscal deficit target for 2009 to 2.8 percent of GDP—0.4 percentage points above earlier target—explained by higher capital expenditure on social infrastructure financed with MDB loans.
  - Tax revenue base noted as low at 13.2 percent of GDP, relying heavily on ad-valorem taxes with a tax elasticity close to one; automatic stabilizers not very strong.
  - Revenue administration measures expected to yield some 0.2 percent of GDP, including modernizing customs administration and border procedures, strengthening collection procedures on tax arrears, and improving tax auditing and enforcement.
  - Considering elimination of certain tax exemptions, including on nontraditional exports.
  - On expenditure, plan to fully eliminate the remaining nonresidential subsidy on electricity and create fiscal space to increase social spending; authorities expect to generate space of up to 0.3 percent of GDP for expanding Red Solidaria and targeted health, education, and storm-mitigation programs.
- MDB financing and public liquidity:
  - Loans comprise a US$400 million financial sector loan from the IADB plus loans to the central government totaling US$950 million to be disbursed over three years.
  - Part of the US$950 million will be used to amortize a US$650 million Eurobond balloon payment maturing in 2011; remainder allocated to investment and social programs.
  - Since March 2008, the government faced difficulties placing domestic debt with maturities beyond the presidential election of March 2009; recently forged consensus to authorize borrowing from two MDBs.

### Program discussions on a Stand-By Arrangement (SBA)
- Objectives of a Fund SBA:
  - Signal policy continuity amid electoral uncertainty.
  - Help sustain investor confidence.
  - Boost economy’s resilience to shocks and strengthen financial sector liquidity buffers.
- Authorities’ stance:
  - Both leading presidential candidates sought dialogue with the Fund and committed publicly to continue maintaining sound macroeconomic policies, official dollarization, and to respect international commitments including CAFTA-DR.
  - Authorities confident that dollarization, resilience, and recent measures would allow absorption of most shocks without drawing on Fund resources.
  - Banking system liquid assets held abroad about 25 percent of private banking system deposits (about US$8.5 billion by end-2008) viewed as first line of defense against deposit outflows.
  - As of end–November, the Central Reserve Bank (BCR) had “free” net international reserves (NIR) of only US$136 million (2 percent of deposits), limiting ability to inject or reallocate liquidity into the banking system.
  - In case of unexpectedly large liquidity shocks that cannot be met through existing buffers, the central bank would draw Fund resources to provide liquidity to banks via repo transactions or outright purchase of bank assets; central bank not allowed to lend to the government.
- Banking System Liquidity (liquid asset holdings; in percent of private sector deposits; sources: Central Reserve Bank of El Salvador; Fund staff calculations):
  - Dec-07 / Jun-08 / Nov-08
    - Most liquid: 21.1 / 22.0 / 24.7
    - Deposits at BCR: 15.1 / 13.8 / 15.7
    - Deposits abroad: 2.8 / 4.3 / 2.8
    - Securities abroad: 3.3 / 4.0 / 6.2
    - Subject to funding constraints: 16.1 / 16.1 / 15.3
    - Central government securities: 4.3 / 4.5 / 3.8
    - Central Bank securities: 11.8 / 11.6 / 11.5
    - Operational liquidity (cash): 2.8 / 2.0 / 2.3
    - Total: 39.9 / 40.1 / 42.3
  - Potential Fund support (300% of quota): 9.3 (percent of deposits)
  - Most liquid plus Fund support: 34.0 (percent of deposits)
  - Memo items (million U.S. dollars):
    - Total private sector deposits: 8,641 / 8,527 / 8,536
    - Total liquidity: 3,450 / 3,421 / 3,608
    - Most liquid: 1,825 / 1,879 / 2,110
    - Potential Fund support (300% of quota): 795 (million U.S. dollars)

### Key risks and scenarios highlighted
- External: U.S. recession impacts via remittances, trade, and capital flows; trade links with the United States pose risk to exports.
- Financial: electoral uncertainty could trigger capital and deposit outflows; limited central bank ability to provide liquidity under dollarization; concentrated foreign bank ownership creates cross-border linkages vulnerability.
- Fiscal: constrained fiscal space, low tax revenue base (13.2 percent of GDP), and reliance on MDB financing; difficulty placing domestic debt with maturities beyond March 2009 prior to MDB approvals.

*Source: _cr0971 - 1.  Selected Economic and Social Indicators (IMF staff report).*

### 18.      The possibility of extremely large shocks was also discussed. The authorities

### 18.      The possibility of extremely large shocks was also discussed. The authorities

### Access
- Proposed SBA would involve frontloaded and exceptional access to increase El Salvador’s liquidity buffer and signal to investors and depositors.
- Current access limits would allow a first purchase equal to a fraction of El Salvador’s quota of SDR 171.3 million (US$265.14 million).
- Staff considers that an initial access of about US$530 million (200 percent of quota) would provide a reasonable increase in the country’s liquidity buffer.
- Total access under the program proposed: 300 percent of quota
  - 200 percent of quota (SDR 342.6 million, or US$530.28 million) made available upon approval.
  - Remaining 100 percent of quota phased evenly following quarterly reviews.
- Even under scenarios of moderate financial stress the program would be fully financed; in the absence of large deposit withdrawals or cancellations of external credit lines, authorities may not need to make purchases under the SBA.
- In the case of large deposit outflows:
  - Exceptional balance of payments pressures in the capital account would arise.
  - Without new external financing, outflows would produce a severe liquidity crunch, large contraction in capital flows, and require significant adjustment in domestic demand.
  - Resources under the SBA would help alleviate the burden of adjustment; if outflows are too large or persistent, authorities would need corrective measures in consultation with Fund staff.

### Box 1 — Assessing the Adequate Access Level (key figures and rationale)
- Free reserves of the central bank amount to only US$136 million.
- Historical episode: 2004 presidential elections saw system-wide deposit outflows of about 3 percent of deposits; some banks lost up to 28 percent of their deposits.
- Metrics suggesting liquidity buffer of about US$800 million, or 300 percent of El Salvador’s quota:
  - A 5 percent deposit withdrawal and a 50 percent rollover of short-term external credit lines would jointly generate liquidity needs of close to US$800 million.
  - Central bank practice of covering about 10 percent of total deposits would amount to about US$870 million for El Salvador.
  - Total bank capital amounts to US$1.2 billion; with a recently approved financial sector loan from the IADB for US$400 million, access to about US$800 million from the Fund would give central bank access to resources roughly equal to total bank capital.
- Conclusion: Speed of potential deposit outflows suggests need for significant frontloading.

### Box 2 — Exceptional Access Criteria (staff evaluation)
- Total proposed access equals SDR 513.9 (US$795 million, 300 percent of quota); only annual access would exceed normal limit while cumulative 300 percent is within normal limits.
- Criterion 1 — exceptional balance of payments pressures on the capital account:
  - Not met (pressures have not yet materialized); program treated as precautionary.
  - Significant risk exists that deposit withdrawals and capital outflows could materialize due to unfavorable external environment and election uncertainty.
- Criterion 2 — sustainable debt position:
  - Preliminary staff calculations indicate debt will remain sustainable absent extremely large deposit withdrawals that could jeopardize banking system solvency.
  - Public debt relatively low, at 40 percent of GDP.
  - Drawdown of full SBA and pre-emptive MDB borrowing would increase debt-to-GDP in 2009, but under baseline prudent policies the ratio would decline to about 35 percent in the medium term.
  - Staff debt sustainability analysis concludes external debt remains sustainable in the medium term.
- Criterion 3 — access to private capital markets:
  - Currently limited access for private sector and government, but good prospects of regaining access as global crisis eases and election uncertainty is resolved.
  - Ratings: Moody’s investment grade; S&P and Fitch one notch below investment grade.
- Criterion 4 — strong policy reforms and implementation capacity:
  - Adherence to dollarization since 2001 implies a good track record and confidence in authorities’ capacity to implement the program.
  - Policies in SBA provide reasonably strong prospect for success.
  - Up-front commitment by political parties to the program demonstrates capacity to deliver proposed policies.

### Program conditionality
- Conditionality focused on maintaining a prudent fiscal stance and strengthening the financial system, reflecting monetary regime and track record.
- Specific conditions and benchmarks:
  - Prior action: Adopt regulation to enhance functioning of interbank market, making central bank a clearing house for interbank transactions.
  - Quantitative performance criteria:
    - Quarterly ceilings on the deficit of the nonfinancial public sector resulting in a deficit of 2.8 percent of GDP for 2009 (quarterly targets), with an adjuster.
    - Zero ceiling on accumulation of net external payments arrears.
  - Structural benchmarks:
    - Maintain reserve requirements on banks at current levels (about 22 percent).
    - Approval by congress of bill to further strengthen financial supervision.
    - Fund willingness to continue providing technical assistance; some TA recommendations could become structural benchmarks after first review.
  - Consultation clause:
    - Standard monetary performance criteria (including a floor on NIR) not particularly useful in an officially dollarized economy.
    - Program contains clause triggered if sum of total deposits in commercial banks plus external short-term bank liabilities of commercial banks with original maturity up to one year falls by 10 percent with respect to level at end–November 2008.
    - Under clause, authorities commit to consult with Fund staff and reach understandings on corrective measures for consideration by the Fund at the next scheduled review.
- Adjuster detail:
  - The adjuster could be for a maximum of US$50 million (0.2 percent of GDP) if additional resources from external multilateral or official bilateral creditors become available.
  - If external financing exceeds this amount, additional resources should substitute for short-term domestic financing.

### Capacity to Repay the Fund
- Assessment: Capacity to repay is strong.
- Supporting factors:
  - Government commitment to macroeconomic stability and prudent fiscal policies.
  - Public debt relatively low (about 40 percent of GDP).
  - Medium-term growth prospects good; El Salvador positioned to return to high growth path when global growth rebounds, benefiting from trade agreements (including CAFTA-DR and potential Association Agreement with the European Union), geographical position, and strong fundamentals.
  - Main presidential candidates expressed support for proposed program.
- Policy requirements for medium term:
  - Raise the primary surplus of the public sector by about 1¾ percent of GDP between 2010 and 2014 through tax measures and reductions in nonpriority spending.
  - Strengthen tax administration: streamline tax incentives (including on nontraditional exports), modernize customs, strengthen collection procedures on tax arrears, improve tax auditing and enforcement.
  - Expenditure-side savings through improved efficiency and targeting of public spending (e.g., energy and transportation subsidies).
- Safeguards and monitoring:
  - Consultation clause acts as safeguard to trigger policy discussions if large deposit losses and/or external credit line losses occur.
  - Updated safeguards assessment of the central bank initiated and to be completed no later than the first review.
  - Central bank continues to comply with key safeguards requirements, including publishing IFRS-based financial statements externally audited in accordance with international standards.
  - Authorities will provide, on a daily basis, bank-level data on total deposits and liquidity position; weekly bank-level data on outstanding short-term external liabilities.

### Staff appraisal (summary findings and policy implications)
- Macroeconomic fundamentals are solid and have improved; fiscal position improved, public debt-to-GDP declined, growth peaked in 2006–07.
- Significant near-term risks from global financial turmoil, U.S. recession, and electoral uncertainty affecting 2009 outlook.
- Main objective of proposed program: preserve macroeconomic stability and boost resilience to shocks by maintaining sound macroeconomic policies, strengthening banking regulatory and supervisory framework, and increasing liquidity buffer.
- Fiscal prudence is cornerstone: authorities committed to keeping the deficit at 2.8 percent of GDP in 2009; projected deficit expected to be financed in full with resources secured from MDBs.
- Banking system indicators:
  - Capital adequacy ratio of 14½ percent.
  - Liquidity ratio of 42 percent (of which more than half are held in highly liquid assets).
- A liquidity buffer of US$800 million from the Fund would significantly increase central bank lender-of-last-resort capability.
- Prospects for policy continuity reasonably high given support from leading presidential candidates; staff will seek early understanding with new administration at first program review.
- Consultation clause provides additional safeguard; a full domestic banking crisis remains a tail risk requiring reassessment of macroeconomic strategy in consultation with Fund staff.

*Source: _cr0971 - 18.      The possibility of extremely large shocks was also discussed. The authorities*

### 33.      In light of these considerations, staff recommends the approval of the requested

### El Salvador—Assessment of the Risks to the Fund and the Fund’s Liquidity Position (excerpt)

### Staff recommendation
- "In light of these considerations, staff recommends the approval of the requested SBA."

### Key economic and price indicators (selected, annual or e.o.p. as stated)
- Real GDP: 2.3, 1.9, 3.1, 4.2, 4.7, 3.2, 2.5 (2003–2009 as shown in Table 1)
- Consumer prices (end of period, e.o.p.): 2.5, 5.4, 4.3, 4.9, 4.9, 5.5, 3.8
- GDP deflator (period average): 2.8, 3.1, 4.8, 4.9, 4.4, 5.6, 3.6

### External sector — volumes, balances, and flows (selected)
- Exports of goods and services, volume: 4.7, 5.7, 1.4, 10.2, 4.5, 8.4, 3.1
- Imports of goods and services, volume: 4.8, 4.1, 3.1, 11.3, 7.3, 3.4, -3.5
- Terms of trade: -4.4, -6.1, -2.9, -0.9, -5.7, -6.6, 6.0
- Real effective exchange rate (e.o.p., + is appreciation) 1/: -3.0, -0.7, 2.4, -0.2, -0.8, 8.0, ...
- External sovereign bond (average spread, basis points): 325, 267, 248, 200, 163, 388, ...
- Current account balance (percent of GDP): -4.7, -4.0, -3.3, -3.6, -5.5, -6.0, -2.7
- Trade balance (percent of GDP): -15.2, -16.8, -17.2, -19.0, -20.0, -19.9, -16.5
  - Exports (f.o.b. including maquila): 21.0, 21.1, 20.2, 20.2, 19.8, 21.3, 21.1
  - Imports (f.o.b. including maquila): -36.1, -38.0, -37.4, -39.1, -39.8, -41.2, -37.6
- Services and income (net): -3.5, -3.3, -3.9, -3.3, -4.0, -3.6, -3.1
- Transfers (net): 4.2, 16.2, 17.8, 18.6, 18.5, 17.5, 16.9
- Net maquila exports (mem): 3.3, 2.9, 3.6, 3.3, 2.8, 3.1, 3.0
- Nominal GDP (billions of U.S. dollars): 15.0, 15.8, 17.1, 18.7, 20.4, 22.2, 23.6

### Money, credit, and financial system (selected)
- Credit to the private sector (percent of GDP): 41.8, 42.9, 43.0, 42.8, 41.7, 41.7, 41.2
- Broad money (percent of GDP): 43.9, 43.3, 42.6, 43.8, 47.1, 45.8, 42.6
- Interest rate (annual, time deposits, e.o.p.): 3.4, 3.3, 4.0, 4.9, 4.4, 4.9, 4.1
- Net foreign assets of the banking system (Millions of U.S. dollars): 1,051; 1,063; 1,115; 1,441; 2,173; 2,348; 1,871
- Net foreign assets (financial system, Millions of U.S. dollars): 1,063; 1,115; 1,441; 2,173; 2,348; 1,871 (Table 4)
- Broad money (Millions of U.S. dollars): 6,841; 7,269; 8,172; 9,601; 10,163; 10,037 (Table 4)

### Public finances (consolidated public sector; percent of GDP)
- Revenues and grants: 16.5, 17.2, 17.1, 17.0, 17.2, 18.6, 18.4 (2005–2011 shown)
- Tax revenue: 12.5, 13.3, 13.4, 13.2, 13.6, 14.3, 14.6
- Expenditure (overall): 19.5, 20.1, 19.0, 19.8, 20.1, 20.2, 20.0
- Current expenditure: 16.8, 17.0, 16.3, 16.9, 16.7, 16.5, 16.4
  - Wages and salaries: 7.1, 7.1, 6.9, 6.9, 7.2, 7.2, 7.2
  - Interest: 2.2, 2.4, 2.5, 2.4, 2.3, 2.3, 2.4
- Capital expenditure: 2.7, 3.1, 2.8, 2.9, 3.4, 3.8, 3.6
- Primary balance: -0.8, -0.5, 0.5, -0.5, -0.5, 0.7, 0.8
- Overall balance: -3.0, -2.9, -1.9, -2.9, -2.8, -1.7, -1.6
- Financing (percent of GDP): 3.0, 2.9, 1.9, 2.9, 2.8, 1.7, 1.6
- Total public sector debt (percent of GDP): 42.0, 41.9, 38.3, 40.0, 41.5, 40.7, 39.8
- External public debt (percent of GDP): 27.7, 26.3, 27.5, 24.3, 23.9, 24.0, 22.8

### Debt sustainability and vulnerability indicators (selected)
- External debt (in percent of GDP, Table 6 baseline): 52.0 (2004), 51.3, 51.4, 44.5, 44.4, 42.8, 41.8, 40.7 (2004–2011 series)
- Change in external debt: -0.6, -0.6, 0.1, -6.9, -0.1, -1.6, -1.0, -1.1
- Identified external debt-creating flows (3): -0.1, -3.0, -2.4, -5.4, -0.8, -1.2, -0.8, -1.3
- Gross external financing need (US$ mln): 2,859; 2,876; 3,194; 3,120; 3,243; 2,982; 3,046; 3,275 (2004–2011)
  - In percent of GDP: 18.1, 16.8, 17.1, 15.3, 14.6, 12.7, 12.2, 12.4
- External debt-to-exports ratio (in percent): 185.4, 191.5, 184.8, 163.9, 153.4, 151.4, 149.6, 143.3
- Debt-stabilizing non-interest current account (Table 6, projections partially shown): values referenced across projection years (see Table 6 for full series)

### Scenarios and bound tests (summary from Figures)
- Debt and public-debt sustainability bound tests were performed including:
  - Interest rate shocks, growth shocks, current account shocks, combined shocks, contingent liabilities shock, and primary balance shock.
- Figures show baseline, scenario, and historical paths for external debt and public debt (percent of GDP) with shaded historical areas; specific box averages and percentiles are presented in the original figures.

### External financing requirements and sources (Table 8, selected, US$ millions)
- Gross financing requirements (selected years): 3,194; 3,120; 3,243; 2,982; 3,046; 3,275; 3,261; 3,326; 3,445
- Components (2006–2014 excerpt):
  - Current account deficit: -675, -1,119, -1,331, -645, -836, -858, -884, -933, -987
  - Debt amortization (total): -2,447, -1,721, -1,514, -2,414, -2,085, -2,260, -2,181, -2,152, -2,199
    - Public sector amortization: -404, -320, -303, -578, -437, -564, -436, -395, ...
    - Private sector amortization: -2,043, -1,401, -1,212, -1,836, -1,649, -1,696, -1,745, -1,757, -1,817
  - GIR accumulation: -72, -280, -398, 77, -124, -157, -196, -241, ...
- Gross financing sources (matching years): 3,194; 3,120; 3,243; 2,982; 3,046; 3,275; 3,261; 3,326; 3,445
  - Public sector disbursements: 901, 205, 653, 918, 465, 540, 301, 161, 111
  - Private sector net inflows: 2,293; 2,915; 2,590; 2,065; 2,581; 2,735; 2,961; 3,165; 3,334
  - Foreign direct investment (selected): 245; 1,426; 431; 323; 462; 619; 801; 862; 928
  - Other financing: 2,047; 1,489; 2,160; 1,741; 2,119; 2,116; 2,159; 2,302; 2,406

### Fund-supported program design: access, conditions, and performance measures (selected)
- Purchase schedule and terms under the Stand-By Arrangement (Table 9; totals shown):
  - Total proposed purchase: 513.9 SDR (and US$795.4 total shown in table context)
- Quantitative performance measures for 2009 (Table 10, selected):
  - Overall balance of the non-financial public sector (cumulative floor): -150 (end-March), -201 (end-June), -427 (end-September), -669 (end-December)
  - Continuous performance criterion: zero-ceiling on non-accumulation of external debt service arrears by the non-financial public sector (definition provided)
  - Indicative target: Total bank deposits plus external short-term bank liabilities (floor) shown as 8,303 (repeated dates)
- Structural measures for 2009 (Table 11, selected):
  - Prior action: Implement regulation to increase effectiveness of central bank intervention in interbank lending market.
  - Structural benchmark (continuous): Maintain prudential reserve requirements of banking system, currently at about 22 percent in effective terms.
  - May 15 benchmark: Pass financial supervision bill containing specified elements (i–iv).

### IMF credit and exposure indicators (Table 12, selected)
- Existing and prospective Fund credit (end of period, SDRs): 0.0 (2008), 471.1 (2009), 513.9 (2010), 513.9 (2011), 369.4 (2012), 117.8 (2013), 5.4 (2014)
- In percent of exports of goods and services: 0.0, 11.0, 11.4, 10.6, 7.1, 2.1, 0.1
- In percent of public sector external debt: 0.0, 12.9, 14.0, 14.1, 10.4, 3.5, 0.2
- Repurchases and charges due from existing and prospective drawings (SDRs): 0.0, 8.9, 12.2, 12.6, 156.0, 257.5, 113.7 (selected series)

*Prepared by the Finance and Strategy, Policy, and Review Departments; approved by Andrew Tweedie and Alan MacArthur; January 9, 2009.*

### 1.      This note assesses the risks to the Fund arising from the proposed Stand-By

### This note assesses the risks to the Fund arising from the proposed Stand-By Arrangement (SBA) for El Salvador

### Background
- El Salvador has not drawn on Fund resources since the early 1980s; it had four SBAs between May 1993 and February 2000, all treated as precautionary.
- Previous SBAs amounts: May 1993 — SDR 47.11 million (38 percent of quota); the last three SBAs — SDR 37.68 million (30 percent of quota).
- El Salvador has had no outstanding Fund credit since end-1991.
- External debt trends (end-2008 estimates):
  - Total external debt expected to fall to below 45 percent of GDP at end-2008 from 52 percent of GDP in 2004.
  - Public and publicly guaranteed external debt expected to fall to 24 percent of GDP at end-2008 from 28 percent of GDP in 2004.
- Debt composition note: nearly 60 percent of public external debt is owed to bilateral and multilateral creditors (resulting in relatively low external debt service).

### Proposed SBA: Access and Phasing (Table 1 — exact schedule and amounts)
- Arrangement length requested: 15-month SBA with access of SDR 513.9 million (300 percent of quota).
- Phasing and purchases:
  - January 2009 (approval): SDR 342.6 million (200 percent of quota) — first purchase.
  - May 2009: SDR 42.8 million (25 percent of quota).
  - September 2009: SDR 42.8 million (25 percent of quota).
  - December 2009: SDR 42.8 million (25 percent of quota).
  - March 2010: SDR 42.8 million (25 percent of quota).
- Total: SDR 513.9 million (300 percent of quota).
- Note: Starting in May 2009, purchases will depend on the completion of a review and on performance criteria for the end of the previous quarter.
- Authorities intend to treat the arrangement as precautionary.

### I. Risks to the Fund (summary of analysis)
- Access magnitude:
  - The proposed access would far exceed previous access for El Salvador and would surpass the annual access limit and reach exactly the cumulative access limit.
  - If all purchases made, total outstanding use of GRA resources: 200 percent of quota with the first purchase; peak at 300 percent of quota from March 2010 to March 2012.
  - In SDRs, proposed access nearly four times higher than El Salvador’s previous peak of Fund credit outstanding in 1983–84; in quota terms, peak exposure lower than those of all earlier and newly approved exceptional access cases.
- Effect on country-level metrics:
  - If fully disbursed, GRA credit outstanding to El Salvador would exceed 3 percent of GDP by end-2009 (Table 6).
  - After the first purchase, El Salvador would become the eighth largest exposure in the GRA.
- Share of public external debt and debt service implications:
  - Outstanding use of Fund GRA resources would rise from zero to account for about 13 percent of public external debt by end-2009 (Table 6).
  - Projected repayments to the Fund as share of public external debt service:
    - 2009: 1.6 percent
    - 2012: 33 percent
    - 2013: 58 percent
  - In exports of goods and services, GRA external debt service would amount to:
    - 2012: about 3 percent
    - 2013: about 4.6 percent

### II. Impact on the Fund’s Liquidity Position and Risk Exposure
- Impact on Fund liquidity (one-year Forward Commitment Capacity — FCC):
  - Proposed arrangement, if fully drawn, would reduce Fund liquidity by about 0.5 percent.
  - Commitments would reduce the one-year FCC by SDR 513.9 million from an estimated level of SDR 97,603.9 million at the time of program approval.
- Concentration and exposure effects:
  - After the first purchase, Fund GRA credit to El Salvador as a share of total Fund credit from the GRA would be about 2 percent.
  - Concentration of Fund credit among the top five borrowers would fall by about 2 percentage points to about 86 percent.
- Prudential perspective:
  - Potential GRA exposure to El Salvador following the first purchase would be equivalent to 5.0 percent of the Fund’s current stock of precautionary balances.
- Selected projected impacts on GRA finances (exact figures from Table 6):
  - Fund GRA credit outstanding to El Salvador:
    - Jan-2009: SDR 342.6
    - 2009: SDR 471.1
    - 2010: SDR 513.9
    - 2011: SDR 513.9
    - 2012: SDR 369.4
    - 2013: SDR 117.8
    - 2014: SDR 5.4
  - Fund GRA credit outstanding to El Salvador (percent of quota):
    - Jan-2009: 200.0
    - 2009: 275.0
    - 2010: 300.0
    - 2011: 300.0
    - 2012: 215.6
    - 2013: 68.8
    - 2014: 3.1
  - Fund GRA credit outstanding to El Salvador (percent of total GRA credit outstanding) — after first purchase: 1.9 (Table 5/6 context).
  - One-year Forward Commitment Capacity (FCC) (as of end-December, 2008): SDR 97,603.9; El Salvador's impact on FCC: (513.9).
  - El Salvador's GRA credit outstanding (percent of current precautionary balances): 4.9 (Jan-2009).
  - Debt and debt service ratios (selected):
    - GRA credit outstanding (percent of total public external debt):
      - Jan-2009: 10.0
      - 2009: 12.9
      - 2010: 14.0
      - 2011: 14.1
      - 2012: 10.4
      - 2013: 3.5
      - 2014: 0.2
    - GRA credit outstanding (percent of GDP):
      - Jan-2009: 2.4
      - 2009: 3.1
      - 2010: 3.2
      - 2011: 3.1
      - 2012: 2.1
      - 2013: 0.6
      - 2014: 0.0
    - GRA credit outstanding (percent of gross international reserves):
      - Jan-2009: 20.4
      - 2009: 28.9
      - 2010: 30.1
      - 2011: 28.4
      - 2012: 19.1
      - 2013: 5.6
      - 2014: 0.2
    - GRA debt service to the Fund (percent of exports of goods and services):
      - 2009: 0.2
      - 2010: 0.3
      - 2011: 0.3
      - 2012: 3.0
      - 2013: 4.6
      - 2014: 1.9
    - GRA debt service to the Fund (percent of total public external debt service):
      - 2009: 1.6
      - 2010: 2.6
      - 2011: 2.3
      - 2012: 32.7
      - 2013: 57.8
      - 2014: 26.5
  - Memorandum items (exact figures from Table 6):
    - Fund's precautionary balances: SDR 6,938.6
    - Fund's residual burden sharing capacity: SDR 40.0
    - Projected payment of charges to the Fund on GRA credit outstanding (percent or units as presented):
      - 2009: 8.9
      - 2010: 12.2
      - 2011: 12.6
      - 2012: 10.9
      - 2013: 5.6
      - 2014: 1.2
    - Projected debt service payments to the Fund on GRA credit outstanding (in same units as table):
      - 2009: 8.9
      - 2010: 12.2
      - 2011: 12.6
      - 2012: 156.0
      - 2013: 257.5
      - 2014: 113.7

### Comparators and context (selected exact comparisons)
- Debt ratios in earlier and newly approved exceptional access cases (end-2008 estimates for El Salvador):
  - El Salvador (2009): Total external debt 44.4 (percent of GDP), Public external debt 23.9 (percent of GDP), Total public debt 40.0 (percent of GDP), Debt to IMF 2.4.
- Fund GRA exposure after first purchase (Table 5, selected lines):
  - Top five borrowers and El Salvador after first purchase (SDR Millions, quota, GDP share as presented):
    - Turkey: 5,534.4
    - Hungary: 4,215.0
    - Ukraine: 3,057.3
    - Pakistan: 2,072.1
    - Iceland: 560.0
    - El Salvador (after first purchase): 342.6; quota 200.0; GDP 2.4; percent of total GRA credit 2.0; percent of quota 1.9 (values as presented in table rows).

### Key policy-relevant observations from the note
- The arrangement would be exceptional access given available purchases in 2009 would exceed 200 percent of quota even under proposed new access limits.
- Authorities' intention: treat arrangement as precautionary since balance of payments pressures have not materialized.
- Risk to Fund liquidity is measurable but modest in relation to precautionary balances: first purchase equivalent to 5.0 percent of precautionary balances; FCC reduction of SDR 513.9 million from SDR 97,603.9 million.

*Source: Finance Department, El Salvador authorities, World Economic Outlook, and IMF staff estimates (content as presented in the provided IMF note).*

### 10.      In the event that El Salvador were to fully draw on resources available under the

### _cr0971 - 10.      In the event that El Salvador were to fully draw on resources available under the

### Burden-sharing and arrears risk
- Charges on the GRA obligations would exceed SDR 10 million in each of the years from 2010 to 2012.
- This would amount to over half of the Fund’s estimated residual burden-sharing capacity, taking into account the newly approved arrangements (see Table 6).
- The Fund’s burden-sharing mechanism would be put under some strain if El Salvador were to fully draw on resources under the proposed SBA and incur arrears on charges accruing to its GRA obligations.
- The impact on the Fund’s burden-sharing capacity of potential arrears from this arrangement would be expected to decline if there is a sustained pick up in lending.
- Footnote summary: Under the burden-sharing mechanism, overdue financial obligations’ consequences are shared by decreasing remuneration and increasing the rate of charge; Executive Board set a floor for remuneration at 85 percent of the SDR interest rate; no ceiling applies to the rate of charge; adjustment for the SCA-1 was suspended effective November 1, 2006 (adopted January 3, 2007).

### IMF assessment of the proposed SBA
- The authorities plan to treat the proposed SBA as precautionary; main goals: signal policy continuity, help sustain investor confidence, and boost the economy’s resilience to shocks.
- The proposed level of access is nearly four times higher than the previous peak Fund exposure to El Salvador.
- The proposed access is not excessively large in terms of most relevant metrics, including the size of the country’s economy and its debt servicing capacity.
- Realization of contingent risks would:
  - Adversely affect El Salvador’s capacity to repay the Fund.
  - Increase the debt service burden if resources are drawn.
- Essential mitigation: sustained and forceful implementation of the program by the new administration, and prompt responses to changes in underlying conditions and deviations from program assumptions.
- El Salvador’s track record of implementing sustainable macroeconomic policies provides confidence in program implementation.

### Risks and contingency planning
- Key risks identified:
  - Large and sudden deposit outflows.
  - Unwinding of cross-border bank loans.
  - Continuation of global financial turmoil and a further slowdown in the United States affecting remittances, trade, and capital flows.
- If stress in the financial system triggered the consultation clause, authorities (in consultation with the Fund) would design additional policy actions to strengthen the external position and enhance prospects of fulfilling financial obligations.
- A further deterioration of the balance of payments, despite Fund support, cannot be ruled out.

### Statement by IMF Staff Representative (January 16, 2009) — developments since staff report
- Some leading indicators of U.S. economic activity during the referenced week point to a possible further deterioration in U.S. prospects for 2009, negatively impacting El Salvador’s outlook for 2009 and 2010.
- Financial indicators at end-December:
  - Total deposits stood at US$8,815 million, around one percent above end-November level.
  - Sovereign spreads have fallen by 100 basis points since end-2008, compared to a decline of only 30 basis points of the regional composite.
- Both leading presidential candidates publicly endorsed main elements of the program, including macroeconomic stability, fiscal sustainability, and dollarization.

### Candidate statements (highlights)
- Rodrigo Ávila (ARENA):
  - Requested IMF approval for a loan of $800 million to provide “economic security” amid the global financial crisis.
  - Stated funds would be available within one month and remain so for a period of 15 months.
  - Committed to respecting terms agreed with the IMF and to policies including official dollarization, strict preventive financial regulations, and a prudent fiscal policy.
- Mauricio Funes (FMLN):
  - Expressed commitment to maintaining macroeconomic stability, preserving dollarization, implementing prudent fiscal policy, increasing social spending and infrastructure investment, and strengthening the domestic financial system.
  - Noted the IMF press release that the arrangement could be supported by SDR 513.9 million (about US$800 million) under a 15-month SBA and that authorities intend to treat the arrangement as precautionary and do not intend to draw on it.

### IMF Press Release and program summary (Press Release No. 09/10; January 16, 2009)
- Executive Board approved a 14½ month SDR 513.9 million (about US$800 million) precautionary Stand-By Arrangement for El Salvador.
- The Salvadorian authorities do not intend to draw on the funds.
- Program aims: strengthen financial defenses, provide adequate liquidity, and reduce risks from global financial turmoil, the U.S. recession, and electoral uncertainties.
- Complementary financing: loans negotiated with the World Bank and the Inter-American Development Bank for a total of US$950 million.
- Director’s statement excerpts:
  - Program aims to strengthen the financial system, maintain a prudent fiscal stance, and increase liquidity buffers.
  - Fiscal program aims to safeguard medium-term sustainability, raise public investment, and shelter vulnerable groups.
  - Measures include increasing government revenue, improving spending efficiency, and lowering electricity subsidies to create space for targeted social spending.
  - Authorities have taken actions: enhance monitoring of bank liquidity and borrowing, maintain prudential requirements for bank reserves and liquid assets, improve the interbank market, and plan a law to strengthen financial sector supervision and regulation.
  - El Salvador’s banking system is well positioned to withstand a significant temporary shortfall of liquidity; access to Fund resources increases liquidity buffer and bolsters confidence.
  - Both main presidential candidates endorsed the program elements, contributing to policy continuity.

### Annex — Recent economic developments and program details
- Macroeconomic context:
  - Real GDP growth projected to slow to 3.2 percent in 2008, compared to 4.7 percent in 2007.
  - Remittances from the U.S. amount to about 18 percent of GDP.
  - El Salvador joined the IMF on March 14, 1946; quota is SDR 171.3 million (about US$258.8 million).
  - El Salvador had no outstanding IMF credits since 1991.
- Program summary bullets:
  - Financial contingency measures: closely monitor bank liquidity and short-term borrowing.
  - Short-term fiscal policy: maintain fiscal restraint by keeping the nonfinancial public sector deficit not exceeding 2.8 percent of GDP in 2009.
  - Structural reforms: further strengthen financial sector regulation and supervision and enhance banking system resilience.
- Central bank / banking system indicators and measures:
  - Liquidity asset requirements raised by three percentage points to 6 percent in June 2008; total prudential requirements (liquidity and reserves) now amount to 28 percent of deposits.
  - Banks required to submit contingency liquidity plans, including availability of external credit lines.
  - Liquidity ratios for the banking system are about 42 percent (more than half highly liquid assets).
  - Capital adequacy is 14.5 percent.
  - Foreign-owned banks’ assets are now above 90 percent.
- Fiscal and policy adjustments:
  - Overall public sector deficit projected to be one percentage point higher than 2007, reaching 2.9 percent.
  - Fiscal deficit target for 2009 revised to 2.8 percent, 0.4 percent above the earlier target.
  - Authorities expected to increase revenues by 0.2 percent of GDP and eliminate nonresidential electricity subsidies, creating additional space for social spending (0.3 percent of GDP to expand the Red Solidaria).
  - Central bank, with Inter-American Development Bank (IADB) resources, will purchase high quality loans to sustain private sector credit growth.
- Exceptional access rationale:
  - Level of access: 300 percent of quota.
  - Staff evaluation: El Salvador meets three of four exceptional access criteria — sustainable debt position, access to private capital markets, and strong policy reform and implementation capacity. It does not presently have exceptional pressures on the capital account and intends to treat the program as precautionary.

### Key numerical values and indicators (as reported)
- Charges on GRA obligations: exceed SDR 10 million in each of the years 2010 to 2012.
- Fund quota for El Salvador: SDR 171.3 million (about US$258.8 million).
- Approved SBA: SDR 513.9 million (about US$800 million); 14½ month arrangement / 15-month references appear in candidate statements.
- Complementary loans negotiated: US$950 million (World Bank and IDB).
- Access level: 300 percent of quota.
- Total deposits at end-December: US$8,815 million.
- Sovereign spreads: fallen by 100 basis points since end-2008; regional composite declined by 30 basis points.
- Real GDP growth: 3.2 percent in 2008, 4.7 percent in 2007.
- Remittances from the U.S.: about 18 percent of GDP.
- Liquidity asset requirement increase: +3 percentage points to 6 percent (June 2008).
- Total prudential requirements (liquidity and reserves): 28 percent of deposits.
- Banking system liquidity ratios: about 42 percent.
- Capital adequacy: 14.5 percent.
- Nonfinancial public sector deficit ceiling for 2009: not exceeding 2.8 percent of GDP.
- Overall public sector deficit projected: 2.9 percent (one percentage point higher than 2007).
- Revenue increase target: 0.2 percent of GDP.
- Additional social spending: 0.3 percent of GDP to expand the Red Solidaria.

*Source: IMF staff report and associated statements contained in the provided content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0971.pdf_