:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/TQU4JMEZVFHK3AHSAMABMZE2IA.jpg "Nayib Bukele, presidente de El Salvador, en una conferencia, en la cual anunció la llegada de un cargamento de vacunas de AstraZeneca, en septiembre de 2021.")
San Salvador — Nayib Bukele completes his third year as president of El Salvador this month, a mandate that put an end to the two-party domination of the country’s political scene that had prevailed since the early 1990′s, after the peace accords that put an end to 12 years of civil war.
Much of the first two years of his mandate were marked by the Covid-19 pandemic, while new challenges have emerged during the third year of his government.
The adoption of Bitcoin (XBT) stands out as one of Bukele’s main legacies, but inflation, the foreign debt crisis and the war against the country’s violent criminal gangs implemented by the president are among the main challenges currently facing his government.
In terms of approval ratings, opinion polls give Bukele citizens’ approval of between eight and nine out of 10, although his mandate has not been short of criticism. The majority of Salvadorans disapprove of the country’s adoption of Bitcoin: 62.3% of those surveyed said they did not agree with the measure, according to a survey by the Universidad Francisco Gavidia in May.
In July 2021, a similar survey found that 77.5% of the population believed the adoption of the cryptocurrency was not a good idea, while a UCA poll in December found that 61.2% of those surveyed believed the country should not be spending public money acquiring bitcoins.
Looking ahead, the aforementioned challenges will continue to deepen. In addition, crucial times will come to define if the Salvadoran economy receives the adequate stimuli to grow and to complete the infrastructure works Bukele promised before taking office.
In his fourth year in office, the political landscape will begin to take on more weight as the 2024 presidential elections approach for a new five-year term.
Bloomberg Línea presents a summary of Bukele’s track record after his third year in office.
Airport expansion
Airports: El Salvador’s air connectivity is improving. In the first quarter of the year, the expansion of the passenger terminal at Mons. Óscar Arnulfo Romero y Galdámez International Airport, the country’s main air gateway, was completed. With this investment, it will expand its capacity to serve five million travelers per year.
The government has also proposed the construction of the so-called Pacific International Airport as a way of developing the country’s eastern region. A pre-feasibility study, awarded to the UDP Peyco-Alben 4000 consortium, is being carried out and should be ready by the end of June. The plan is for the new terminal to mobilize one million passengers after its first decade of operations.
Bitcoin
The country adopted Bitcoin as legal tender in September 2021, one of Bukele’s personal initiatives, and which has had a mixed reception so far.
This public policy set much of the tone for the government’s third year in office. As part of its strategy, El Salvador has acquired 2,301 bitcoins, using $103.6 billion of public coffers. The president argues that a giant increase in the price of bitcoin is only a matter of time; however, nine months since the enactment of the Bitcoin Law, these transactions have been loss-making for the country’s taxpayers.
:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/VEGUUUUJBZG75CWU45ZSXVJ2LU.jpg "El Salvador’s Bitcoin Losses Swell to 28% as Bukele Buys More")
Covid-19
The Covid-19 pandemic severely impacted the first two years of Bukele’s government. Since December 2021, the country has begun to take steps toward a post-pandemic era: Covid-19 tests are no longer requested from travelers entering the territory, and in April the Ministry of Health lifted the restriction on the use of masks for citizens.
The vaccination campaign stands out among the government’s actions with the best approval rate among Salvadorans. In March 2021, the first doses arrived and in April 2021, the Ministry of Health inaugurated a Vaccination ‘Megacenter’. To date, 4.29 million people have received two doses of the vaccine, while 1.6 million have also received a booster jab and 241,898 people a second booster, or fourth dose.
Foreign debt
El Salvador is in a critical situation regarding its foreign debt obligations. In June 2021, when Bukele began his third year in office, El Salvador’s sovereign bonds were trading between $0.95 and US$1.09; in June 2022, the securities are worth less than $0.40.
The spread paid by Salvadoran debt against U.S. bonds, as measured by JP Morgan’s EMBI Index, also soared, from 5.78% on June 1, 2021, to 23.36% on May 27, 2022, which is even higher than Argentina’s debt, which is 19.16% on the EMBI index.
The collapse accelerated as Bitcoin adoption caused friction with international bodies, which pointed out the risks and the lack of a clear plan on how to address them. As a result, negotiations for a $1.3 billion credit facility stalled.
Rating agencies have been cutting El Salvador’s rating due to the growing risk of default. Fitch Ratings places it at CCC; Moody’s, at Caa3; and S&P at CCC+, all three with negative outlooks. The government must honor $800 million in bonds in January 2023, as well as a bulky domestic debt and an increasingly high external debt service.
:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/PZT7XVOPQZFWNO5U6FFRDU7FD4.jpg "True or False: Is Crypto Collapse a Real Risk for El Salvador’s Economy?")
Gangs
The government’s declaration of war against the country’s gangs has dominated the agenda since late March, in response to a sharp rise in homicides. The Legislative Assembly granted Bukele a so-called ‘Emergency Regime’, authorized until June 25, under which security forces have apprehended more than 35,000 alleged gang members.
Various surveys show that the population supports this policy, but the voices of national and international human rights organizations have been raised to warn of the criminalization of social groups in situations of vulnerability and poverty, given the arbitrary nature of the arrests and the lack of minimum conditions in prisons.
An alleged negotiation between the government and gangs operating in the country came to light in investigative reporting by media outlet El Faro, and the breakdown in the talks is said to have triggered an increase in retaliatory homicides. Although authorities have not commented on the issue, there has been a similar history of negotiations with gangs under the FMLN and ARENA governments.
Gasoline
As part of the government’s initiatives to alleviate fuel price increases, El Salvador froze gasoline prices, by eliminating taxes on gasoline in March, with a price freeze imposed in April. The provision was to end on May 31, but was extended by the Legislative Assembly until August 31. Prices are currently $4.15 per gallon for regular gasoline, $4.31 for the higher octane variety, and $4.14 per gallon for diesel.
Highways
Some 15km of highway will be widened on the road known as Los Chorros, which interconnects Greater San Salvador with the Colón area, a manufacturing and residential enclave and gateway to the western part of the country. It will also have a viaduct and the the works are expected to mitigate the risks posed by traffic in the area, where landslides occur frequently, especially during the rainy season. The infrastructure project will cost some $250 million and will benefit some 60,000 motorists who use the road daily.
Inflation
Price increases began to bite harder since the middle of last year, and were accentuated by the war between Russia and Ukraine. In April, inter-annual inflation stood at 6.5%, above the 2.7% recorded in the same month of 2021, according to data from the Central Bank. In view of this, the authorities implemented a plan of 11 measures to contain inflation, which includes the elimination of import tariffs on food products, more subsidies for propane gas, and the elimination of taxes on gasoline, among others.
Judiciary
The Supreme Court of Justice has opened the door for Bukele to stand for reelection in 2024, through a reinterpretation of Article 152 of the Constitution, which expressly prohibits presidential candidacies for those who have served as president for more than six months. Although the current president has not stated that he will run, he could do so if he resigns six months before the end of his term.
Macroeconomy
El Salvador’s economy has advanced at a double digit rate of 10.3%, according to the central bank, but it will not be able to sustain such growth. GDP growth projection is 3.2% for 2022, the lowest in the Central American region.
Remittances to the country between January and April totaled $2.44 billion, 4.2% higher than during the same period last year. However, they showed signs of decline in March and April, in the context of more adverse conditions in the U.S. economy.
It remains to be seen whether this is a temporary blip, or a long-term phenomenon, but what is certain is that remittances function as an important factor in generating foreign exchange, almost as much as exports.
In terms of the trade balance, sales of Salvadoran goods totaled $2.47 billion in the first four months of the year, while imports totaled $5.79 billion .
According to an estimate by the Salvadoran Foundation for Economic and Social Development (FUSADES), private sector investment increased by 18.4% in 2021, to the highest level since 1960.
Opposition
The country’s political opposition is having difficulty establishing a counterweight since losing the 2019 elections to Bukele. A survey by the Centro de Investigaciones Estudios Sociales y Económicos de Centroamérica (CIESCA) found states that Nuevas Ideas, Bukele’s party, has 71.97% of voting intention for the 2024 presidential elections “if they were today”, while the FMLN, would obtain 2.32% and the right-wing ARENA party 3.66%.
According to a survey by the Francisco Gavidia University, 70.1% of Salvadorans believe that the FMLN will actually disappear, while only 15.9% think that the political party will re-emerge and 61.1% think the same of ARENA, with 22.3% are optimistic for its recovery.
Bukele maintains a tense relationship with some sectors of civil society, such as the media, which he often refers to as “the opposition media”, and with NGOs that defend human rights.
Pacific railroad
The proposed Tren del Pacífico railroad project is in a feasibility studies phase, and would imply the construction of 342km of railroad lines in the country. The Ministry of Public Works (MOP) informed that the first line of the train would connect the country’s western zone with San Salvador, that would pass through the port of Acajutla and Sitio del Niño, providing both cargo and passenger transportation services.
Public finances
The Ministry of Finance has improved tax collection at a double-digit rate. In 2021, gross tax revenues were $5.83 billion, an increase of 26.1% over 2020 levels. A gap of US$498 million remained to be financed in the 2022 budget. “In our five fiscal scenarios, there is no obligation that is not covered,” according to Minister of Finance Alejandro Zelaya.
Taxation continues to grow this year. As of April, current revenues and contributions rose by 15.5%, to $2.64 billion. However, debt has become a heavy burden for the government. The non-financial public sector recorded indebtedness of 81% of GDP, including pensions, as of December 2021, for a total of $23.26 billion.
A study by the School of Economics of the Universidad de El Salvador estimates that the debt service payments programmed for this year total $1.43 billion, $918.5 million for interest payments and $512.1 million for capital amortization, but which is without taking into account that in January 2023 the government must amortize $800 million in bonds.
San Salvador public works
Urban renewal and development of the Historic Center of the capital San Salvador has been promoted by Bukele since he served as mayor of the city between 2015 and 2018. The city government plans to build two tourist corridors, one of them on Rubén Darío Street, with the remodeling of city squares and the installation of underground cabling. To this end, some 1,000 informal vendors have been evicted from the area.
:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/UEHZTLGOLVFZ3I32KF5K2LWDDE.jpg "La intervención en el Centro Histórico de San Salvador incluirá al Parque Bolívar. Foto: VMT")
Surf City
Surfers beating the challenging waves of the Salvadoran sea stand out in postcards of El Salvador as a tourist destination. Bukele has said he will allocate $100 million to improve Surf City’s infrastructure, a project that has three key pillars: public tourism infrastructure, human resources and population. “Surf City is more than a place. Everyone thinks it is a surf city and no, it is more than 300km of marine coastal strip,” said Morena Valdez, Minister of Tourism, in an interview with Bloomberg Linea.
United States
The tense relationship with President Joe Biden’s government deepened in Bukele’s third year. Throughout 2021, the United States included in the Engel List key officials of the government of New Ideas, accused of corruption, among them Bukele’s Chief of Staff, the Minister of Labor, the Legal Secretary of the Presidency, and the Prisons Director, among others. In addition, U.S. senators presented this year an initiative for the United States to evaluate the risks posed by the adoption of bitcoin in El Salvador and asked the State Department for an action plan to mitigate them.
:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/NIEMEU3RWIEPHPEZ3U7TK2BCBM.jpg "The implementation of Bitcoin as legal tender has divided the population. Photo: Camilo Freedman/Bloomberg")
Ukraine
Bukele’s government never stated its position on Russia’s invasion of Ukraine and international attention was focused on El Salvador when it abstained from supporting a resolution condemning the Russian aggression at the United Nations. Following that, one U.S. senator called for reconsideration of the free trade agreement with the country and Nicaragua.
‘Volcano’ bonds
When Bukele announced the issuance of bitcoin bonds, also known as “volcano bonds”, in November 2021, the world’s attention was focused on this new alternative financing mechanism. Over the months the ‘volcanic eruption’ has been extinguished however, as debt holders’ became more nervous, and there is still no date for the placement of the $1 billion in bonds, the funds from which the president has said will be used to build ‘Bitcoin City’ in Conchagua.
:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/746W626OWFA6FAVELBMVL3POTU.jpg "El Salvador’s Leader Loved by Crypto Faithful, But Not by Bondholders")
Wallet
To encourage the deployment of bitcoin in El Salvador, the government’s ‘Chivo Wallet’ was released, with a $30 welcome bonus incentive for use. Although it reached four million downloads, its use has been declining over time due to the end of the economic stimulus, as well as due to technical problems. At its peak, it processed an average of 20,000 transactions a day, then dropped to 5,000, figures that include its use with Lightning Network technology, according to Leo Elduayen, co-founder and CEO of Koinbank.
:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/TJAHAJAG7RBLRHPPXDHFZ6E3MI.jpg "El Salvador’s Chivo Wallet Transactions Decline 75% Since Peak")
Translated from the Spanish by Adam Critchley
