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Central America: Remittances slowdown begins to hit home

The recession in the US economy is beginning to bite in central America, leading to a big slowdown in remittance flows that are vital to the region’s health. Guatemala and El Salvador, in particular, are most vulnerable to a drop in the growth in money flows from relatives in the US and elsewhere.

In Guatemala, funds grew 4.5% to $4.3 billion, the smallest increase in nine years according to the central bank. Remittances contribute about 11% of the country’s GDP.

In El Salvador, remittance flows reached $3.8 billion in 2008, up 2.5% on the previous year, according to the central bank. That compares with a growth rate of 6.5% in 2007. About 2 million Salvadorians live in the US, the country’s main trading partner.

Despite the worrying trend, Guillermo Handal, El Salvador’s finance minister, says that the country’s economic fundamentals are solid. "Given the current environment, we remain positive, as public investment for 2009 will reach a record level of $725 million," he says. "In addition, agriculture production will grow nearly 10%, helping El Salvador become self-sufficient in its food supply for basic grains."

The country’s financial system is weathering the storm too. "El Salvador’s financial system is the most solid in central America and within the Latin American region is one of the best regulated and strongest regarding reserve requirements," says Handal.

He adds that reserve requirements have been raised to 25% from 22%, while commercial banks have nearly another 7% in highly liquid assets totalling more than 32% in reserves to meet all their short-term requirements.

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