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Within weeks of leftist president Mauricio Funes' election last March, it became clear that the prior right-leaning administration of Antonio Saca had not been upfront about the state of El Salvador's economy. While analysts blame electoral considerations for the lack of disclosure, subsequent revelations regarding skyrocketing unemployment rates, dramatically decreased GDP and plummeting remittances were no less troubling for the legal community....

Within weeks of leftist president Mauricio Funes' election last March, it became clear that the prior right-leaning administration of Antonio Saca had not been upfront about the state of El Salvador's economy. While analysts blame electoral considerations for the lack of disclosure, subsequent revelations regarding skyrocketing unemployment rates, dramatically decreased GDP and plummeting remittances were no less troubling for the legal community. Regardless of political considerations, El Salvador's legal community is in agreement over the fact that, as one lawyer says: "The new government has inherited a very bad financial situation from the outgoing government."

In addition to inheriting a faltering economy, President Funes has also taken over several arbitration suits filed by foreign companies under the Cafta (Central American Free Trade Agreement) treaty. In one case, a subsidiary of Pacific Rim Mining is suing the government for not following through with promised permits to extract gold deposits discovered by the company. The outcome of this case and other pending suits in the mining and energy industries will test the strength of Cafta's terms, as well as the new administration's relations with foreign entities operating in El Salvador.

While there were initial doubts as to the direction in which President Funes would take the nation, many investors remain optimistic about their operations in El Salvador in terms of the threat of government takeover. Foreign businessmen operating in the country are buoyed by the fact that the parliament remains well mixed and President Funes has made initial promises to respect Cafta and private property rights.

Investors remained cautious at the end of 2009, but if the promise holds, there may be a flurry of investment for El Salvador in 2010. Financial lawyers see opportunities in the telecoms and IT industries, specifically in regard to outsourced call centre operations that have sprung up in the nation lately.

Perhaps one positive thing that can be said is that Saca's regime had negotiated several crucial international loans that will carry over to the new administration. At the end of 2008 the government secured a $500 million loan approved by the World Bank and another $450 from the Inter-American Development Bank, which will help float the nation through the hard times. Additionally, the International Monetary Fund granted an $800 million precautionary loan at the start of last year to boost the liquidity of the economy, though the country was expected to end 2009 with a deficit after growing 3.2% the previous year.