Obligation El Salvador 7.65% ( USP01012AN67 ) en USD

El Salvador

71.91 % ▼

Salvador

USP01012AN67 ( en USD )

7.65% par an ( paiement semestriel )

14/06/2035

Prospectus brochure de l'obligation El Salvador USP01012AN67 en USD 7.65%, échéance 14/06/2035

10 000 USD

1 000 000 000 USD

P01012AN6

15/06/2024 ( Dans 57 jours )

L'Obligation émise par El Salvador ( Salvador ) , en USD, avec le code ISIN USP01012AN67, paye un coupon de 7.65% par an.
Le paiement des coupons est semestriel et la maturité de l'Obligation est le 14/06/2035

Offering Circular

The Republic of El Salvador
US$225,000,000 7.65% Notes due 2035
Issue Price: 96.71% plus accrued interest from June 15, 2006
Interest Payable June 15 and December 15
The Notes will mature on June 15, 2035. Interest will be payable semi-annually in arrears on June 15 and December
15 of each year commencing on December 15, 2006.
The Notes will be a further issuance of, and will be consolidated to form a single series with, the Republic of El
Salvador's outstanding 7.65% Notes due 2035 issued on June 10, 2005 and April 26, 2006. The total aggregate
principal amount of the previously issued Notes and the Notes now being issued will be US$1,000,000,000.
The Notes will contain provisions, commonly known as "collective action clauses," regarding acceleration and
voting on future amendments, modifications and waivers that differ from those applicable to certain of the Republic
of El Salvador's outstanding Public External Indebtedness (as defined herein). Under these provisions, which are
described in the sections entitled "Terms and Conditions of the Notes -- Events of Default" and "-- Modifications,
Amendments and Waivers," the Republic of El Salvador may amend the payment provisions of the Notes and
certain other terms with the consent of the holders of 75% of the aggregate amount of the outstanding Notes.
Except as described herein, payments on the Notes will be made without deduction for or on account of withholding
taxes imposed by the Republic of El Salvador. Application has been made to list the Notes on the Luxembourg
Stock Exchange and to have the Notes admitted to trading on the Euro MTF Market, the alternative market of the
Luxembourg Stock Exchange. Application will be made to list the Notes on the El Salvador Stock Exchange.
Delivery of the Notes will be made on or about July 20, 2006.
The Notes have not been and will not be registered under the Securities Act. The Notes may not be offered or sold
within the United States or to U.S. persons except to qualified institutional buyers in reliance on the exemption from
registration provided by Rule 144A and to certain persons in offshore transactions in reliance on Regulation S. You
are hereby notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of the
Securities Act provided by Rule 144A.
Joint Lead Managers and Joint Bookrunners
Citigroup
JPMorgan

July 13, 2006

El Salvador

IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE
REPUBLIC AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS OR THE RISKS INVOLVED.
You should rely only on the information contained in this document or to which we have referred you. We have not
authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell
these securities. The information in this document may only be accurate on the date of this document.
This Offering Circular may only be used for the purposes for which it has been published.

________________

TABLE OF CONTENTS
PRESENTATION OF INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
ENFORCEMENT OF CIVIL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
EXCHANGE RATE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
OFFERING CIRCULAR SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
RECENT DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
THE REPUBLIC OF EL SALVADOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
THE SALVADORAN ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
FOREIGN TRADE AND BALANCE OF PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
MONETARY SYSTEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
PUBLIC SECTOR FINANCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
PUBLIC DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
TERMS AND CONDITIONS OF THE NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
SUBSCRIPTION AND SALE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
BOOK-ENTRY SETTLEMENT AND CLEARANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
TRANSFER RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
TAXATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
VALIDITY OF THE NOTES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Because the Republic or its affiliates may purchase and resel the Notes in certain transactions exempt from registration under the U.S.
Securities Act of 1933, as amended (the "Securities Act"), the ability of any subsequent holder of Notes to reoffer, resel , pledge or
otherwise transfer the Notes pursuant to the exemption provided by Rule 144 under the Securities Act may be limited.
_______________

NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN
FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES WITH THE STATE OF NEW
HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE
STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT
FILED UNDER RA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT
THAT THE EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE
SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR
RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO
MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY
REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
The Notes wil be direct, general and unconditional obligations of the Republic. The Notes wil , at al times, rank equal y without
any preference among themselves and at least pari passu with al other present and future unsecured and unsubordinated Public
External Indebtedness (as defined herein) of the Republic.
i

The Notes wil be issued in registered form only. Notes sold in offshore transactions in reliance on Regulation S under the
Securities Act ("Regulation S") wil be represented by a permanent global Note (which may be subdivided) in ful y registered form
without interest coupons (the "Regulation S Global Note") deposited with a custodian for, and registered in the name of a nominee of,
The Depository Trust Company ("DTC") for the respective accounts at DTC as such subscribers may direct. Notes sold in the United
States to qualified institutional buyers (each a "qualified institutional buyer") as defined in, and in reliance on, Rule 144A under the
Securities Act ("Rule 144A") wil be represented by a permanent global Note (which may be subdivided) in ful y registered form
without interest coupons (the "Restricted Global Note" and, together with the Regulation S Global Note, the "Global Notes")
deposited with a custodian for, and registered in the name of a nominee of, DTC for the respective accounts at DTC as such
subscribers may direct. Beneficial interests of DTC participants (as defined under "Book-Entry Set lement and Clearance") in the
Global Notes wil be shown on, and transfers thereof between DTC participants will be effected only through, records maintained by
DTC and its direct and indirect participants, including Euroclear Bank S.A./N.V., as operator of the Euroclear System ("Euroclear")
and Clearstream Banking, société anonyme ("Clearstream, Luxembourg"), if applicable. See "Book-Entry Set lement and Clearance."
Except as described herein, definitive Notes wil not be issued in exchange for beneficial interests in the Global Notes. See "Terms
and Conditions of the Notes -- Form, Denomination and Title." For restrictions on transfer applicable to the Notes, see "Transfer
Restrictions" and "Subscription and Sale."
The Republic has taken reasonable care to ensure that the information contained in this Offering Circular is true and correct in all
material respects and not misleading as of the date hereof, and that, to the best of the knowledge and belief of the Republic, there has
been no omission of information which, in the context of the issue of the Notes, would make this document as a whole or any such
information misleading in any material respect. The Republic accepts responsibility accordingly.
This Offering Circular does not constitute an offer by, or an invitation by or on behalf of, the Republic or the Joint Lead Managers
to subscribe to or purchase any of the Notes. Each recipient shal be deemed to have made its own investigation and appraisal of the
financial condition of the Republic. The distribution of this Offering Circular or any part of it and the offering, possession, sale and
delivery of the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Offering Circular comes are
required by the Republic and the Joint Lead Managers to inform themselves about and to observe any such restrictions. See
"Subscription and Sale" and "Transfer Restrictions" for a description of further restrictions on the offer, sale and delivery of Notes
and on distribution of this Offering Circular and other offering material relating to the Notes.
Each person purchasing Notes pursuant to Rule 144A will be deemed to:
· represent that it is purchasing the Notes for its own account or an account with respect to which it exercises sole
investment discretion and that it or such account is a qualified institutional buyer (as defined in Rule 144A); and
· acknowledge that the Notes have not been and will not be registered under the Securities Act or any State securities laws
and may not be reofferred, resold, pledged or otherwise transferred except as described under "Transfer Restrictions."
Each purchaser of Notes sold outside the United States in reliance on Regulation S wil be deemed to have represented that it is
not purchasing Notes with a view to distribution thereof in the United States. Each person purchasing Notes pursuant to Rule 144A
also acknowledges that:
· it has been afforded an opportunity to request from the Republic and to review, and it has received, all additional
information considered by it to be necessary to verify the accuracy of the information herein;
· it has not relied on the Joint Lead Managers or any person affiliated with the Joint Lead Managers in connection with its
investigation of the accuracy of the information contained in this Offering Circular or its investment decision; and
· no person has been authorized to give any information or to make any representation concerning the Republic or the Notes
other than those contained in this Offering Circular and, if given or made, such information or representation should not be
relied upon as having been authorized by the Republic or the Joint Lead Managers.
IN CONNECTION WITH THIS ISSUE OF NOTES, THE JOINT LEAD MANAGERS MAY, THEMSELVES OR
THROUGH THEIR AFFILIATES, OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN
THE MARKET PRICE OF THE NOTES AT A LEVEL WHICH MIGHT NOT OTHERWISE PREVAIL IN THE OPEN
MARKET, TO THE EXTENT PERMITTED BY APPLICABLE LAWS. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
ii

PRESENTATION OF INFORMATION
Unless otherwise specified or the context requires, references to "US dollars" and "US$" are to United States dol ars and
references to the "colón" and "colones" and "¢" are to Salvadoran colones.
References to the "Republic" and "El Salvador" are to the Republic of El Salvador.
References to "FOB" are to exports free on board and to "CIF" are to imports including cost, insurance and freight charges.
Data identified as "preliminary" in the tables included in this Offering Circular reflect an interim calculation and is subject to
change.
References to "maquila" are to the assembly of imported goods for re-export.
References to "Central America" and "Central American countries" are to El Salvador, Costa Rica, Guatemala, Honduras and
Nicaragua.
Certain economic and financial data in this Offering Circular is derived from information previously published by Banco Central
de Reserva de El Salvador (the "Central Bank") and other governmental entities of El Salvador. This data is subject to correction and
change in subsequent publications.
Certain other information in this Offering Circular is derived from information made publicly available by the United Nations.
References to "net international reserves" are to foreign currency reserves. The term "current account surplus (deficit)" as applied
to the balance of payments includes foreign aid, unless otherwise specified.
Certain amounts included in this Offering Circular have been subject to rounding adjustments; accordingly, figures shown as totals
in certain tables may not be an arithmetic aggregation of the figures which precede them.
FORWARD-LOOKING STATEMENTS
This Offering Circular contains certain forward-looking statements (as such term is defined in the Securities Act) concerning the
Republic. These statements are based upon beliefs of certain government officials and others as well as a number of assumptions and
estimates which are inherently subject to significant uncertainties, many of which are beyond the control of the Republic. Future
events may differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements
are principal y contained in the sections "Offering Circular Summary," "Recent Developments," "The Republic of El Salvador," "The
Salvadoran Economy," "Foreign Trade and Balance of Payments," "Monetary System," "Public Sector Finances" and "Public Debt."
In addition, in those and other portions of this Offering Circular, the words "anticipates," "believes," "estimates," "expects," "plans,"
"intends," "projections" and similar expressions, as they relate to the Republic, are intended to identify forward-looking statements.
Such statements reflect the current views of the Republic with respect to future events and are subject to certain risks, uncertainties
and assumptions. The Republic undertakes no obligation publicly to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. In light of these risks and uncertainties, there can be no assurances that the
events described or implied in the forward-looking statements contained in this Offering Circular will in fact occur.
iii

ENFORCEMENT OF CIVIL LIABILITIES
The Republic is a foreign sovereign state. Consequently, it may be difficult for investors to obtain or realize upon judgments in the
courts of the United States. Under its Constitution, the Republic is not permit ed to consent to jurisdiction of the courts of any foreign
jurisdiction. The Republic has not consented to the jurisdiction of any court outside El Salvador in connection with actions arising out
of or based on the Notes or in connection with the enforcement of any judgment arising out of such actions, nor has the Republic
appointed an agent for service of process outside El Salvador. The Republic has agreed to the fol owing arbitration provisions as part
of the Terms and Conditions of the Notes.
Any dispute, controversy or claim arising out of or relating to the Notes (other than any action arising out of or based on the
United States federal or state securities laws), including the performance, interpretation, construction, breach, termination or invalidity
thereof shal be final y set led by arbitration in accordance with the Arbitration Rules of the United Nations Commission on
International Trade Law (excluding Article 26 thereof) as in effect on the date of the Fiscal Agency Agreement (the "UNCITRAL
Arbitration Rules"). The number of arbitrators shal be three, to be appointed in accordance with Section II of the UNCITRAL
Arbitration Rules. The appointing authority shal be the Chairman of the International Court of Arbitration of the International
Chamber of Commerce. The third arbitrator may be (but need not be) of the same nationality as any of the parties to the arbitration.
The place of arbitration shal be New York, New York. The language to be used in the arbitration proceedings shal be English. Any
arbitral tribunal constituted under this paragraph shal make its decisions entirely on the basis of the substantive law of the State of
New York.
The decision of any arbitral tribunal shal be final to the fullest extent permit ed by law, and a court judgment may be entered
thereon by any Salvadoran court lawful y entitled to enter such judgment. In any arbitration or related legal proceedings for the
conversion of an arbitral award into a judgment, the Republic wil not raise any defense that it could not raise but for the fact that it is
a sovereign state. The Republic has not consented to the jurisdiction of any court outside El Salvador, in connection with actions
arising out of or based on the Notes or in connection with the enforcement of any judgment arising out of such actions, nor has the
Republic appointed an agent for service of process outside El Salvador. The Republic waives any forum non conveniens defense in
any proceeding in El Salvador.
No arbitration proceedings hereunder shall be binding upon or in any way affect the right or interest of any person other than the
claimant or respondent with respect to such arbitration.
The Republic's consent to arbitration shal not preclude a holder of any Note from instituting legal proceedings against the
Republic in the courts of El Salvador.
The Republic has represented that it has no right to immunity on the grounds of sovereignty or otherwise, from the execution of
any judgment in El Salvador, or from the execution or enforcement in El Salvador of any arbitral award (except, in each case, for the
limitation on alienation of public property) in respect of any proceeding or any other matter arising out of or relating to its obligations
contained in the Notes. The enforcement by a Salvadoran court of a foreign arbitral award is subject to recognition by the Corte
Suprema de Justicia (the "Supreme Court") of the Republic, which wil recognize such award if al the required formalities are
observed and the award does not contravene Salvadoran national sovereignty, public policy and "good morals." Under the laws of the
Republic, public property (bienes de uso público) of the Republic located in El Salvador is not subject to execution or at achment,
either prior to or after judgment. The execution of a judgment against the Republic in El Salvador is only available in accordance with
the procedures set forth in Articles 450 et seq. of the Salvadoran Civil Procedure Code, which envisions registration of the judgment
for inclusion in the budget for payment in a subsequent fiscal year of the Republic.
iv

EXCHANGE RATE INFORMATION
From 1989 to December 31, 2000, although El Salvador set no official exchange controls on the colón and the exchange rate was
permit ed to float freely based on market forces, the Central Bank had a policy of purchasing and sel ing US dol ars periodical y for
the purpose of limiting movement in the colón/US dol ar exchange rate.
On November 30, 2000, the Legislative Assembly approved the Ley de Integración Monetaria (the "Monetary Integration Act"),
which fixed the colón to the US dol ar at ¢8.75 to US$1.00, effective January 1, 2001. Since January 1, 2001, the colón/US dol ar
exchange rate has been fixed at ¢8.75/US$1.00 pursuant to the Monetary Integration Act. The Monetary Integration Act al ows free
circulation of the US dol ar in the Salvadoran economy and makes the US dol ar the unit of account for the financial system in El
Salvador. See "Foreign Trade and Balance of Payments -- Exchange Rate Policy and Foreign Exchange Rates."
Currency conversions contained in this Offering Circular should not be construed as representations that colones have been, could
have been or could be converted into US dol ars at the indicated or any other rate of exchange.

v

OFFERING CIRCULAR SUMMARY
The fol owing summary does not purport to be complete and is qualified in its entirety by, and is subject to, the detailed
information appearing elsewhere in this Offering Circular.
The Republic of El Salvador
General
El Salvador is a republic and its form of government is a representative democracy. In March 2004, Elias Antonio Saca González
of the Alianza Republicana Nacionalista ("ARENA") party was elected president of the Republic. His election marked the fourth
consecutive term that a member of ARENA, a pro-market political party, was elected president. He took office on June 1, 2004,
succeeding Francisco Flores, who was elected in 1999.
El Salvador is geographical y the smal est and also the most densely populated of the five Central American countries. It is
bounded on the south by the Pacific Ocean, on the northwest by Guatemala and on the northeast and east by Honduras.
In 2005, El Salvador had a nominal gross domestic product ("GDP") of approximately US$17.0 bil ion, an increase from US$15.8
bil ion in 2004, and real GDP grew at a rate of 2.8%, compared to 1.8% in 2004.
According to the United Nations Human Development Report 2005, per capita GDP based on 2003 figures and adjusted for
purchasing power parity was US$4,781.
Economy
Beginning in late 1989, the government began to implement a number of measures designed to strengthen the private sector and to
minimize the government's role in the economy. In the early 1990s, the government implemented reforms such as the privatization of
the banking system and reorganization of the Central Bank as an independent institution, the introduction of a value added tax, the
elimination of price controls, the simplification of the tax system and the liberalization of foreign trade policy through the reduction of
tariffs and the establishment of free trade zones. Benefiting from these measures, as wel as the signing of the Peace Accord (the
"Peace Accord") in 1992 which ended 12 years of guerrilla war in the Republic, El Salvador's real GDP grew at an average annual
rate of 5.1% from 1992 to 1999.
More recent steps taken by the government to stimulate the economy and strengthen macroeconomic stability include the
fol owing:
· Adopting the Monetary Integration Act, which went into effect on January 1, 2001 and fixes the colón to the US dollar at
¢8.75 to US$1.00, allows free circulation of the US dollar in the Salvadoran economy and makes the US dollar the unit of
account for El Salvador's financial sector. These reforms were intended to stabilize permanently the value of the colón
against the US dollar, reduce interest rates, increase the local savings rate, control inflation, encourage foreign investment,
and simplify the management of the economy. The fixed exchange rate replaced the free floating exchange rate that had
been in place since 1989. The Central Bank is not permitted to be a funding source for the central government. The power
of the Central Bank to issue new colones or coins ceased as of January 1, 2001. All deposits, credits, pensions and other
operations of the financial system were redenominated to US dollars on that date. Non-financial firms may use either
colones or US dollars to express their financial records and accounting. Salaries and wages may be denominated in either
colones or US dollars and prices can be specified in colones or US dollars. See "The Salvadoran Economy -- Foreign
Trade and Balance of Payments -- Exchange Rate Policy and Foreign Exchange Rates."
· Promoting trade and foreign investment by eliminating certain tariffs and applying three tariff rates to approximately
90.0% of imported goods, adopting laws allowing unrestricted repatriation of earnings by foreign companies, providing for
rebates of duties on certain exports and encouraging the establishment of free trade zones covering 1,421,072 square
meters throughout the country as of December 31, 2005, which is more than double the area established as of December
31, 2001. These measures are intended to stimulate manufacturing, principally by maquila plants, which are exempt from
import and export duties and enjoy certain income tax exemptions. In addition, the Republic has implemented the
initiatives of the Mercado Común Centroamericano (the "Central American Common Market" or "CACM"), qualified for
enhanced, preferential access to the United States market under the Caribbean Basin Initiative (the "CBI") and reached
free trade agreements with Mexico, Chile, the Dominican Republic, Panama and the United States. El Salvador entered
into the U.S.-Dominican Republic- Central America Free Trade Agreement (the "DR-CAFTA") with the United States, the
five member countries of the Central America Economic Integration System and the Dominican Republic. On March 1,

1

2006, the DR-CAFTA entered into force between El Salvador and the United States. See "The Salvadoran Economy --
Foreign Trade and Balance of Payments -- Regional Integration and Free Trade."
· Modernizing the banking sector in El Salvador through the privatization of commercial banks and the savings and loan
associations in order to promote competition and the development of a stronger financial system. The government also
created the Superintendencia del Sistema Financiero (the "Superintendency of the Financial System") to regulate the
banking industry. Further, the Legislative Assembly enacted legislation limiting loans to shareholders, increasing
minimum capital requirements in light of the Basle Accord, regulating the supervisory powers and independence of the
Superintendency of the Financial System and creating the Instituto de Garantía de Depósitos (the "Deposit Guaranty
Agency"), which guarantees deposits up to US$7,890 and has the authority under certain circumstances to provide funding
to banks with liquidity problems. See "Monetary System -- Financial Sector." Subsequent legislation has provided
additional protections to depositors by creating stricter capital and risk management requirements and granting broader
authority to the Superintendency of the Financial System.
· Reforming the pension system with the creation of a new system pursuant to which a substantial portion of the public
"pay-as-you-go" pension system was replaced by a private system based on individual contributions. Under the new
system, participating workers make monthly contributions to private pension funds that invest in permitted Salvadoran
securities. Subsequent reforms to the pension system law reduced the government's obligations by authorizing the
government to make certain payments pursuant to a 15-year annuity rather than in one lump sum and eliminated
employees' option to retire after 30 years of contributions to the system regardless of age. At December 31, 2005, over 1.2
million Salvadoran workers, or 47.2% of the Salvadoran workforce in 2004, were participating in the private system and
US$2.9 billion in assets, equivalent to 17.1% of 2005 nominal GDP, were managed by the system's private pension fund
administrators. See "The Salvadoran Economy -- Employment and Wages -- Pension Reform."
· Reducing the government's role in many sectors of the economy through a series of privatizations designed to encourage
private investment and foster competition. Since 1998, the government has received net privatization revenues of
approximately US$1,419.5 million, through the privatization of the country's electricity distribution companies and
telecommunications providers. The government also granted private concessions for certain services and facilities at the
international airport and plans to grant additional airport concessions at a future date. In addition, the government sold an
alcohol factory and six state-owned sugar mills to private investors. In December 2004, the government sold most of its
remaining interest (41.54% of the company's total shares) in the state-owned telecommunications company for
approximately US$294.9 million. The Republic also announced that it plans to grant concessions at its port facilities at
Acajutla and La Unión, which is currently under construction. See "The Salvadoran Economy -- Privatizations and
Concessions."
· Modifying the tax system, commencing with the introduction of a value added tax and subsequently increasing the value
added tax rate from 10.0% to 13.0%. In addition, the government eliminated exemptions, closed loopholes, provided the
tax administration with the tools to enforce tax compliance and to accelerate the imposition of fines and sanctions,
increased excise taxes on tobacco products and alcoholic beverages, implemented measures to reduce tax evasion,
introduced special contribution levies on gasoline, diesel fuel, guns, ammunition, fireworks, lodging and airport
departures, and reformed the customs service. Reforms to the tax laws also included, among other things, clarifying the
requirements for eligibility for tax credits, limiting deductions related to inter-company loans, disallowing deductions for
expenses incurred in certain taxing jurisdictions, establishing a unified nondiscretionary period for taxpayers to pay
delinquent tax liabilities, prohibiting settlement of cases involving customs smuggling, increasing the jail term that may be
imposed on tax evaders and eliminating the possibility of tax evaders avoiding a prison sentence. The government has
reformed a number of customs laws to permit the Republic to comply with its international commitments, such as those
under the DR-CAFTA, the Central American Uniform Customs Code (the "CAUCA") and other international agreements
concerning international trade of goods. See "Public Sector Finances -- Taxation and Customs."
· Continuing its policy to modernize public sector institutions, the Republic has reduced the size of the central government
by decreasing the number of employees and combining ministries. The number of government employees also decreased
due to attrition and voluntary early retirement. The government has amended the Ley del Servicio Civil (the "Civil Service
Law") to establish a more flexible public sector employment policy, which has reduced the government's payroll. The
government enacted legislation in 2004 aimed at further decentralizing the government by increasing municipal allocations
in the general budget from 6.0% to 7.0% of current revenues beginning in 2005. The Republic has also implemented
measures designed to reduce government expenditures for subsidies in the areas of electricity and water consumption and
public transportation and focus subsidies on those sectors of the population most in need of such assistance. In July 2004,
the government mandated that all public sector entities apply strict measures aimed at increasing public savings and, in

2

May 2005, President Saca mandated a reduction of 5.0% in the budget of all public sector institutions. During 2006, the
Republic expects to institute a new public savings policy aimed a reducing government expenditures that will set aside 5%
of the budgeted funds for certain public institutions to cover unbudgeted expenses.
· Promoting tourism through, among other things, enacting laws and regulations designed to foster the development of the
tourism sector, including the use of the proceeds from special contribution levies on lodging and airport departures toward
developing the sector. See "The Salvadoran Economy -- Promotion of Tourism."
· Investing in infrastructure projects, including the construction of a major port facility at La Unión and a 50 megawatt
thermal power plant at Atéos. See "The Salvadoran Economy -- Infrastructure Investment."
· Implementing a comprehensive education plan, known as Plan Nacional de Educación 2021 (the "2021 National
Education Plan"), which includes improving school facilities, providing greater access to computers and the Internet and
establishing technological institutes, as well as implementing a program, known as Programa Red Solidaria (the
"Solidarity Network"), which provides monetary assistance to rural families that enroll their children in school, among
other things. See "The Salvadoran Economy -- Education Initiatives (Plan Nacional de Educación 2021)."
Econom ic Performance
El Salvador's real GDP increased at an average annual rate of 2.2% from 2001 to 2005, compared to an average annual rate of
growth of 4.7% between 1992 and 2000, primarily as a consequence of the rise in international oil prices, the effects of natural
disasters in El Salvador, the decline in 2001 and 2002 of international coffee prices and the slow-down in the U.S. economy in 2001
and 2002. El Salvador's rate of inflation averaged 3.3% annual y for the period from 2001 to 2005. Primarily as a result of the
Monetary Integration Act, the average interest rate on short- and long-term loans fell to 7.0% and 7.9%, respectively, for the month of
December 2005, compared to 12.2% and 13.7%, respectively, for the month of December 2000.
Worker remit ances from Salvadorans abroad and a strong capital account resulted in the steady growth of foreign currency
reserves at the Central Bank from 1992 through 1999. Net international reserves declined, as the Central Bank provided commercial
banks with US dol ars in connection with the implementation of the Monetary Integration Act. Net international reserves rose
thereafter, reaching US$1,829.4 mil ion at December 31, 2005. See "Foreign Trade and Balance of Payments -- Foreign Currency
Reserves."
The Republic's ratio of public external debt to GDP, which was 39.3% in 1992, decreased to 24.5% in 2001 and subsequently
increased to 36.5% in 2005 primarily due to borrowings by the Republic to pay for reconstruction costs incurred as a result of the two
2001 earthquakes and to finance the Republic's pension obligations. The ratio of total public sector debt declined from 46.0% of GDP
at December 31, 2004 to 45.2% of GDP at December 31, 2005.
In recent years, maquila (assembly for re-export) has been the most dynamic activity within the economy, contributing an average
of 13.0% of total production in the manufacturing sector in real terms from 2001 to 2005. According to the Ministerio de Economía
(the "Ministry of Economy"), as of December 31, 2005 there were 304 maquila plants, 140 of which are located in free trade zones,
with the remaining 164 operating outside the free trade zones. Over half of the maquila plants established in the free trade zones
produce apparel and linens, mainly for export to the United States. In 2005, maquila exports represented 53.6% of total exports of
goods. While Maquila exports increased by 10.1% from 2001 to 2005, they decreased by 5.4% in 2005. In 2004 and 2005, maquila
exports were negatively impacted by increased competition from China and Nicaragua as a result of lower labor costs in those
countries, as wel as the expiration of the Agreement on Textiles and Clothing. In addition, maquila exports declined sharply in the
last quarter of 2005 due to the effects of Hurricanes Stan and Katrina, which temporarily discontinued the importation of inputs from
the United States and negatively affected the production of exports. See "The Salvadoran Economy --Principal Sectors of the
Economy -- Manufacturing."
Traditional y, coffee has been the main agricultural product of the Republic and an important component of the overall Salvadoran
economy. As the economy has increasingly come to rely on manufacturing production, particularly maquila, the importance of coffee
to the economy has declined. Coffee accounted for 1.5% of real GDP and 12.6% of agricultural production in 2005 compared to 3.8%
and 25.5%, respectively, in 1993. Coffee is nevertheless an important source of employment in El Salvador, generating approximately
63,173 jobs during the 2004/2005 harvest, which accounted for 2.3% of employment nationwide in 2004. Coffee is also an important
source of foreign currency. In 2005, coffee accounted for 4.8% of total Salvadoran exports of goods.

3