El Salvador Year in Review: Economic Position in 2023 and Predictions for 2024
El Salvador is facing a major economic challenge: the foundations of the economy are weak. The debt-to-GDP ratio continues to be high — meaning most available dollars go to debt payments over investments — and the country has limited access to further debt in the international market. The Government of El Salvador has used a number of levers to address and mask its economic woes. From exercising macroeconomic policy options and administrative-financial maneuvers to employing an authoritarian control of information operation via a sophisticated communications Goliath, the government of Nayib Bukele has been largely successful is distracting the general public from the country’s financial troubles. At the same time, market conditions have been favorable, shielding the impacts of these economic hardships from the middle and upper-middle class: El Salvador has benefited from lower inflation, liquid markets, and strong remittance flows. These conditions combined have led to a dreary close to 2023 and a projected sluggish year in 2024. To add to the country’s difficulties, two major risks loom large over Bukele’s government next year: 1) a potential deceleration to the flow of remittances due to a U.S. economic slowdown and 2) the consequences of the ever-increasing debt burden.
Inspired by Clint Eastwood’s western classic, this post takes a year in review via the good, the bad, and the ugly.
The Good — Favorable Conditions in 2023: Inflation (Finally) Down, Liquid Financial Markets, and Strong Remittance Flows
Inflation
During the middle of 2022, general interest rates in El Salvador were above 7% while the interest rate for food reached an all-time high of 22.4%. In early 2023, March’s inflation numbers demonstrated that the macroeconomic conditions in the country had not improved: the cost of food and non-alcoholic beverages increased 12.61%, with the price of eggs jumping 55%. After a peak in August 2022, inflation came down across the board and currently hovers around 2.97% for general inflation and 3.17% for food at the close of the year.
Liquid Markets
As a dollarized economy, El Salvador’s macroeconomic maneuverability is limited and dependent on the U.S. Federal Reserve. In 2023, as the Fed tightened the money supply to cool down the U.S. economy, these adjustments were expected to have consequences in El Salvador. While El Salvador should have felt the impact, it largely did not. One explanation comes from Alexander Pinilla, VicePresident of Bancoagrícola, “not all of the increases from the Fed transmit to El Salvador’s economy, there is still much liquidity in the country.” A liquid banking system is good news for consumers who are looking to borrow and invest those dollars to improve productivity and hence growth — one need only look at the construction sector which is booming in El Salvador. Even with the pace of construction at an all-time high, the banks are still flush with money and looking to lend. This flood of cash could be one reason that bank interest loans are projected to come down in the new year.
Remittances
In Central America, El Salvador is the second largest recipient of remittances, with the majority, 95.8%, coming from the United States. Over the last five years (2018–2022), El Salvador has seen a strong flow of funds coming into El Salvador and 2023 was no different. Between January and October 2023, there was a 5% increase in remittances compared to 2022. The importance of remittances as a key driver to El Salvador’s economic growth cannot be understated. With 24.3% of the country’s GDP contributed to remittances, and complimented with access to credit, these funds have masked years of low productivity growth.
The Bad — Debt and Debt Burden
According to the World Bank, “challenges persist for El Salvador, such as the need to advance reforms for fiscal sustainability. The fiscal response to the COVID-19 crisis helped mitigate its impacts, cost around 16.5 percent of GDP and, together with low revenues and rigid expenditures, pushed public debt to beyond 90 percent of GDP.” El Salvador’s debt issues have been brewing for decades. While now outdated, the table below demonstrates that El Salvador is the recipient of a number of international loans. In addition to the list provided, another Inter-American Development Bank (IDB) loan was approved in 2022 for tourism and resilient infrastructure, as well as a $150 million loan from the Development Bank of Latin America and the Caribbean (CAF in the Spanish acronym). The Central America Economic Integration Bank (or BCIE in the Spanish acronym) loan has increased from the table provide from $1.5 billion to almost $3 billion.
In addition to existing loans, COVID-19 subsidies, the failed launch of the digital crypto currency digital wallet where up to $12 million was reportedly embezzled, tax holidays on Christmas bonuses and certain imported goods have all added to the growing government debt.
The Bad Continued — Addressing/Masking Economic Woes
In 2023, the Government of El Salvador used a number of levers to address and mask its economic woes. In response to high debt burdens, governments generally have five options: 1) create a special purpose vehicle, 2) cut spending, 3) reduce debt, 4) redistribute wealth, and 5) print money (i.e. issuing more debt). El Salvador used four out of the five.
Special Purpose Vehicles (i.e. Administrative Debt Reshuffling)
Debt is high, dangerously so. In response, the Government made a recent administrative maneuver that lowered the government’s debt — on paper. In December 2022, the government passed a pension system reform that created the Salvadoran Pension Institute (Instituto Salvadoreno de Pensiones or ISP), an autonomous entity which unloaded debt from the government’s docket. However, this special purpose vehicle is just a paper exercise: the debt remains with the government. With this maneuver public debt was “reduced” from 83.7% to 78% of GDP.
Reduce Debt
In 2023, all eyes were on El Salvador as its Eurobond debt repayment matured. No amount of accounting voodoo could make up for a $800M bond with a 7.75% coupon — the government did not have the cash on hand. Knowing full well of the looming crisis, the government conducted a partial debt buyback offer, which was largely successful. The government also issued a debt buyback for their 2025 Eurobond with similar results. A question must be asked, where did the money come from? The winds were in El Salvador’s favor as a large part of the funds came from income tax revenue and the value-added tax (VAT), which came in larger than expected.
Redistribute Wealth
This lever has had limited use. The Government declared a number of holidays, such as those leading up to the Central American Games, passing the cost onto the private sector.
Print Money: Issue More Debt and Syphon Market Liquidity
Printing money has by far there most used (and abused) tool in the toolkit. The government has debt — a lot — and it continues to grow. While access to external debt has been limited, El Salvador has not been completely cut off from the international debt markets as mentioned above.
Another tool at the government’s disposal has been forcing banks to lend to the government. By restructuring short- and medium-term debt to local bonds, the Government is increasing short-term economic risk in two ways: 1) making banks assume more government debt (increasing the banks’ risk exposure), and 2) creating a potentially difficult fiscal situation for the government as these local bonds mature in 360 days at high interest rates. Still, the government has moved forward issuing new debt, recently $100 million in local bonds in June and an additional $500 million in August.
The Ugly — Authoritarian Information Manipulation
Closing off Access to Reliable Data
Since the Bukele Administration has come to power, the government has been more closed off to disclosing financial information to the public. As one example, in March of 2023, the IMF embarked on its yearly mission to El Salvador — such visits are required by member countries. Such missions, known as consultations, provide a public report on the economic and financial policies and identifies potential risks and recommendations for sustained economic growth. However, the Salvadoran government announced, for the first time, that it would embargo the report thus creating an opaque understanding of the country’s full financial picture. In that same vein, the government closed the General Statistics and Census Office (la Dirección General de Estadísticas y Censos or Digestyc), another source of independent data.
Discredit Critics via Cyberattacks and Audits; Become the Only Source of “Credible” News
The Bukele government has used the power of the state to disrupt the media landscape and control the overall narrative. With a government-sponsored news program on a state-owned tv channel, 14 radio stations and an official government-backed newspaper, the messages that are transmitted are constant: the government is succeeding; those who criticize the government are enemies of the state.
In addition to traditional media, the Bukele Administration has used social media to attack counter narratives. For example, Freedom House reported that “[f]ake news and disinformation campaigns are widespread and fomented by key [Salvadoran] government officials, including through surrogate online media outlets.” One investigative report conducted by Reuters uncovered the existence of “troll farms” that were “tasked with manipulating El Salvador’s political discourse.” The Salvadoran president has also used his social media presence on X (formally known as Twitter) to launch attacks directly against those who criticize the government. In 2020, the president singled out one investigative digital newspaper for a financial audit from the Ministry of Finance. Later that same year, he accused them of fraud. The harassment from the state has not just been limited to one news outlet. As reported by Reuters, the offices of seven non-governmental organizations were raided on “alleged irregularities in the allocation and management of public funds.”
Use Spyware to Monitor Public Discourse
At the same time, and of note in 2023, the government has used spyware to monitor individuals and organizations considered hostile regardless of country of origin — including from the United States. The New Yorker reported on how the government purchased an Israeli-based company’s spyware called Pegasus to monitor “nearly three dozen journalists and opposition politicians.”
The Ugly Continued — Political-financial Chess
Of the international loans mentioned earlier, the BCIE has become the country’s biggest lifeline. With a loan of almost $3 billion, the BCIE is funding 14 different projects in the country ranging from security to education and construction. The BCIE is so important to El Salvador that it sought, unsuccessfully, to position itself to obtain even more loan money from the bank. In an attempt to circumvent the IMF and international lenders, El Salvador attempted a hail Mary pass to install former Finance Minister, Alejandro Zelaya, as the president of the CBIE. Such a move was important for financing purposes: the BCIE can only lend a country up to 25% of its portfolio to one country, and El Salvador is inching closer to that threshold.
Conclusion — High Debt + Limited Access to Cash = Low Expected Growth
According to the World Bank, growth is hindered when debt-to-GDP ratio reaches above 77% (El Salvador’s is 78% or 83.7% of GDP depending on whether you take into account the government’s use of a special purpose vehicle). Under such conditions, a country is spending more than it is taking in and finds itself more likely to default on their loans. El Salvador has worked hard to mask this reality from its population but for how much longer until everyone feels the pinch?
The economy’s squeeze is impacting everyday people, particularly the poor, according to polls from reputable sources. The recent survey from the Francisco Gavidia University (UFC), Four years of government and electoral perspectives 2023: These Are the Data, and We Do Not Accept Returns notes: “the lack of access to employment (40.9%) and the high cost of living (34.1%)” are the principal problems that President Bukele has not addressed. A similar finding emerged in a March survey from La Prensa Grafica, a major independent newspaper in El Salvador, that found 43.3% of respondents expressed dissatisfaction about the state of the economy.
As we look to 2024, the picture suggested another year of slow grow and with two risks that will loom large: potential ebbs to remittance flows and consequences from the El Salvador’s increasing debt burden. In terms of growth, The World Bank has the most optimistic outlook with a forecast of 2.3% for 2024.The IMF, like your barista at your favorite coffee shop, tamped down on GDP growth expectation at 1.9% for the same year. The global credit rating agency, Standard and Poor, seems to be in the middle of the forecasts with 2.2%, and the more bullish Fitch Solutions, a global analytic company, predicts growth less than 1.6%.
Risks in 2024
A U.S. economic downturn could jeopardize reliable remittance inflows. According to economist Elizabeth Wilke, U.S. GDP numbers for November 2023 saw that the U.S. economy grew at 4.9%, the fastest since 2021. The pace of spending has increased and savings decreased, which could signal a slowdown. According to the Wall Street Journal, economic projections for 2024 suggest the upcoming 12 months will see slow growth, and this economic deceleration could dampen remittances to El Salvador.
In terms of El Salvador’s debt worries, there are few options that remain. Short of a full default on their loans, a deal with the IMF, reportedly still in the works according to Bukele, would not only provide a path for debt relief but potentially boost the country’s investment grade to issue new debt via international bonds. Absent a deal with the IMF, El Salvador will have few options to avoid the beginnings of a renewed credit downgrading, a continuing of an ever closing market for their debt, and, at worst, defaults. Such a scenario would create a downward spiral for El Salvador with debt rising faster than productivity and asset prices from surging construction reaching bubble-bursting proportions.
In 2024, we likely to see a continuation of the expropriation of land for infrastructure works that began in 2023. Another gamble, the Frankenstein like Bitcoin Volanco Bond, could provide temporary breathing room. And of course there is also China. El Salvador could continue to embed itself with the Middle Kingdom beyond small projects and take advantage of its own rescue lending program. China’s rescue lending program, according to research by the World Bank, has lent out more than $170 billion, which corresponds to roughly 20% of total IMF lending.
However, despite such turbulent year, Bukele ultimately accomplished what he set out to do in 2023: elevate the profile of the country and distract the population from the economic woes prior to elections in 2024. And while there are many doubts as to El Salvador ending next year in a strong economic position, with 2024 being one of both presidential and congressional elections in this small Central American county, one can bank on one thing: increased government spending.