Economic news from El Salvador

The US State Department recently issued its 2023 report on the investment climate in El Salvador.  The opening paragraphs of the executive summary of this report offer a pretty good summary of the forces impacting the economy of the country:

El Salvador’s location, preferential trade terms under the Central American Dominican Republic Free Trade Agreement (CAFTA-DR), use of the U.S. dollar as legal tender, and recent improvements in the business environment are strengths as an investment destination. Significant levels of sovereign debt, the legacy of decades of gang violence and a lack of transparency in rulemaking are weaknesses.

GDP rebounded strongly from the pandemic to 11.2 percent growth in 2021. The economy grew 2.6 percent in 2022. The IMF forecasts real GDP will grow 2.4 percent in 2023.

Public debt is on an unsustainable path and creates uncertainty about El Salvador’s ability to honor its future commitments. El Salvador has engaged in negotiations with the International Monetary Fund (IMF) on a new lending agreement but to date those discussions are at an impasse.

For the last thirty years, El Salvador has lagged its regional peers in attracting foreign direct investment (FDI). This is attributed in part to widespread, gang-related crime and extortion. In March 2022, the Government of El Salvador (GOES) initiated a State of Exception (SOE) that suspended certain constitutional rights. The subsequent arrest of over 67,000 alleged gang members has significantly reduced gang-related activity. The implementation of the SOE has raised concerns about the rule of law and human rights of prisoners. Nonetheless, the SOE enjoys broad public support and is contributing to improved consumer confidence and optimism about economic conditions. Domestic companies and the Salvadoran diaspora have increased investment because of the safer environment, mainly in tourism, construction, wholesale, and retail sectors. Security improvements have not yet translated into significant new FDI. How the government will wind down the SOE and restore constitutional rights is not clear at this time.

The government paints a different image of economic prospects through its public relations messaging.  For example, with a social media blitz and glowing stories from government-allied press, president Bukele announced this week that the country had signed a contract with Google for Google Distributed Cloud services. The announcement included this hyperbolic video over the benefits that the alliance would bring.  

Announcements of big technology projects are common from the president's office.  A similar announcement of a relationship with Amazon Web Services in 2019 never came to fruition.  An arrangement with Microsoft to provide access to Office 365 on student computers also had great fanfare but little actual change in education (especially since the government now says that all of its education efforts are through Google Classroom).  While Bukele proclaims that El Salvador will become the technology hub of Central America, Intel announced yesterday a concrete $1.2 billion investment in its operations in Costa Rica.

It will probably take more than video releases on social media to improve the finances of Salvadoran families.  Economic growth in El Salvador in El Salvador appears quite weak in 2023. Although the country rebounded smartly in 2021 from pandemic slowdowns of 2020, economic growth slowed to 2.6% in 2022, and now international economists are forecasting growth for 2023 to be lower than 2% after the economy grew at a rate of only 0.8% in the first quarter.  ECLAC estimates for the region have El Salvador with the lowest growth rate in Central America this year.

The price of food in El Salvador continues to reflect the impact of recent inflation. The cost of the government's benchmark basket of foodstuffs in July in urban areas reached $255.35, up from $204.80 24 months ago.  In rural areas the increase went from $148.10 to $193.98 today.

Family remittances from abroad continue to be a positive force for El Salvador's economy. Remittances exceeded $4 billion in the first six months of 2023, an increase of 5.2% from the same period in 2022. Use of crypto currencies to send remittances fell by 28%.

El Salvador's government bonds have recovered as much as 70% from their lows in international markets.   However only the bonds maturing in 2025 are approaching their par values, with a level of default risk continuing to be built into longer maturity dates.