, The impact of COVID-19 on El Salvador, Honduras and Nicaragua’s GDP

The impact of COVID-19 on El Salvador, Honduras and Nicaragua’s GDP


How has COVID affected GDP in El Salvador?

The economic crisis caused by COVID-19 has affected all countries worldwide, as the pandemic caused an impact that transcended from the health field to the economic field. The impact of the crisis in El Salvador is transmitted through the worldwide drop in supply and demand, even though El Salvador was the country in Central America that most quickly adopted strong containment measures against the outbreak and continues to be one of the least affected in the region, the quarantine measures chosen by the government led to the paralysis of productive sectors, which caused a decrease in income, and a collateral effect on economic
activity, as has occurred in the rest of the economies of the world. In addition to the pandemic, we must add the damages caused by tropical storm Amanda, which affected the Salvadoran territory at the beginning of June of this year.

A key factor to understand the effects of the crisis in the country is the high dependence on remittances, since the pandemic affected several countries in the world, mainly the United States, which generated a significant reduction in family remittances. towards El Salvador, which as of May decreased by 11.6%.

In June, economic activity fell again, with construction, commerce, transport and storage being the sectors most affected. However, the drop was less than in April and May, indicating that the economy was stabilizing. Likewise, remittances recovered, due to the recovery of the US labor market, and although exports continued to decline in July, the drop was much more moderate than in June, while imports also eased their decline, suggesting an improvement both from external and internal demand.

The economic results during the first six months of 2020 have reflected a 9.3% contraction in the Gross Domestic Product (GDP) compared to the same period of the previous year (2019), a contraction that was not greater thanks to the implementation of countercyclical policies by of the Government of El Salvador, which were aimed at supporting household income and consumption through the delivery of cash transfers and food packages, extensions for the payment of income taxes, postponement in the payment of basic services, mortgages and personal loans, as well as to boost aggregate demand through public spending and investment in infrastructure, equipment and supplies necessary for the care of the health emergency in the country, highlighting the different phases of Hospital El Salvador.

How is GDP expected to close by 2020?

From the production approach, in the first half of 2020 there were reductions in 15 of the 19 aggregates of economic activities that make up the GDP, the most affected being Artistic, entertainment and recreational activities (31.2%); Accommodation and food services (-28.3%); Professional, scientific and technical activities (-20.3%); Manufacturing Industry (-18.3%);
Construction services (-17.5%); Commerce (-15.7%); Transportation and storage (-14.9%) and Mining and quarrying (-13.8%).

However, four activities registered positive results in the first half of 2020: Financial and insurance activities (6.1%); Water supply, sewerage, waste management and sanitation activities (3.1%); Supply of electricity, gas, steam and air conditioning (2.0%.); and Human Health Care and Social Assistance Activities (0.1%).

The main economic effect of the pandemic in the country was observed in the second quarter, given a contraction of 19.2%, preceded by a growth of 0.8% in the first quarter. It should be noted that this drop is lower than that of our main trading partner, the United States, which in the same quarter registered a rate of -31.4%.

According to the World Bank, despite the measures chosen by the government to limit the impact of the pandemic, the country will have a negative impact on poverty reduction and economic growth and El Salvador’s GDP is expected to contract a 8.7 percent in 2020, while the
International Monetary Fund (IMF) indicates that the fall in GDP will be 9%, the strongest so far forecast, this due to the decline in economic activity, lower aggregate demand in international markets and the reduction of family remittances, mainly from the United States, expecting
economic growth to be 4.9 percent in 2021.

The following will show the economic growth that the country has had over the years, where a low variation in GDP is noted in 2020:

What is the GDP / GDP outlook for 2021?

For 2021, growth according to the Central Bank of 3.9% is projected, which will moderate in the following years, which will depend on the different economic agents, the economic performance of the main commercial partners and the government support measures that are

According to the Focuseconomics Consensus Forecast for Central America and the Caribbean, the long-term trends and economic indicators, as well as changes in inflation forecasts, and their evolution in 2020 and 2021 in El Salvador, are as follows:

Despite the challenges that the country has had to face from COVID and tropical storms, El Salvador has great potential to boost economic growth; it is a country with access to many markets, a growing workforce and an industrial solid base that can support the expansion of the commercial sector for stronger and more inclusive growth.

The Impact of Covid-19 plus ETA & IOTA in Honduras

Governmental measures, Projected GDP in 2020 and outlook for 2021 On February 10, 2020, the Honduran Government declared a health emergency
as a result of COVID-19. As of March 16, a mandatory curfew was established for the Central District, the city of La Ceiba and the department of Choluteca, places where at that time had confirmed cases of COVID-19. This mandatory curfew was extended nationwide until December 31, 2020, through Executive Decree PCM-023-2020.

The pandemic is expected to affect not only aggregate demand and supply
chains for primary products exported by Honduras, but also the maquila sector which consists of the production of garments and wire harnesses and
automotive components.

The Honduram economy will have a contraction in 2020 that will oscillate
between 7 and 8% of its Gross Domestic Product (GDP) due to the COVID-19
pandemic, as per reported by the president of the Honduran Central Bank
(BCH), Wilfredo Cerrato.

There has been a 41% drop in the hotel and gastronomic sectors, compared to the same period in 2019. In addition, private construction has fallen this year by 32.9%, while the manufacturing industry fell 21%, (BCH).

The BCH presented the new revision to economic growth 2020, considering the adverse impacts of the recent hurricanes ETA and IOTA, which through the application of an econometric model Estimated will be a negative -9.5%

This downward revision has been strongly influenced, among other issues, by the significant weight that the agricultural sector represents in our economy and which was seriously affected by the passage of the recent storms.

A recent report released by the Economic Commission for Latin America and the Caribbean (CEPAL), illustrated how the impact of the storms ETA and IOTA in Honduras, had an impact of 45,676 million lempiras in losses (US$ 1.9 billion).

The private sector suffering the highest impact with more than 36,210 million lempiras (US$ 1.5 billion); while the public sector suffers effects of 9,458 million lempiras (US$ 394 million) in losses.

The CEPAL team had the support of the government of Honduras, led by the
Secretary of Finance and General Government Coordination, as well as the
United Nations System in Honduras, the World Bank, the Inter-American
Development Bank (IDB), and others cooperation partners.

The report cites that: “The impacts of the two storms in Honduras have been devastating, both in economic terms and a humanitarian level, there are more than four million people affected. There are 92,000 people in shelters and 62,000 houses affected”.

The four sectors mostly affected were:

  1. Agricultural Sector.
  2. Commercial Sector.
  3. Manufacturing/Maquila Industry.
  4. Infrastructure/Construction Industry

These sectors represent 70% of the impact, for which it is estimated that
Honduras will have a slow recovery next year.

It is also important to consider that these sectors are the ones that generate a significant number of jobs in our country.

Economic Growth in 2020, by phenomenon:

Exports have shown signs of recovery:
At the end of the third quarter of 2020, exports showed an increase of 0.3% (US $ 8.6 million), highlighting the rise in the exported value of bananas, gold, sugar and palm oil.

Meanwhile, imports of general merchandise showed a reduction of 17.1% (US $ 1,279.9 million), due to the decline in most of the components – according to use or destination – as a consequence of the contraction in domestic economic activity due to the measures adopted to cope with the Covid-19 pandemic.

New reduction in the Monetary Policy rate:
The objective of the BCH with the reduction of the Monetary Policy Rate is to continue promoting flexible financial conditions and to place the reference rate at minimum levels, promoting a reduction in the cost of financing, thus stimulating the progressive recovery of the demand for credit and favoring the resurgence of investment and consumption, in line
with the economic reopening, as well as with the gradual replacement of the country’s productive infrastructure.

Final remarks:
In this context, it is imperative to lay the foundations to promote a resilient and sustainable recovery, to definitively address the barriers to development and avoid severe social and economic setbacks.

This response should include lower tax collection and take measures to improve credit flexibility, in order to enhance cash flow in the short term, while the economy reactivates and containment measures loosen up.

Although the pandemic has slowed down the economic activity more than
expected, a recovery is expected for next year that will be in a range between 3.5% and 4.5%.


For more information, contact us at: info@central-law.com

Leave a Reply