El Salvador’s economy is beginning to see the light. It is true that this was the great pending issue for Nayib Bukele, the famous president of this Central American nation, but little by little changes are beginning to be seen that have led the investment bank JP Morgan increases potential growth (what the economy can grow without generating imbalances) notably in its latest review. Potential growth is the ‘framework’ to which the economy must adjust. The larger this framework, the greater the growth of the activity can be in a sustainable way. From JP Morgan they explain that the radical decrease in insecurity in the country has been the basis for increasing their future forecasts for El Salvador. All of this, along with Bukele’s commitment to bitcoin, is leading the country’s sovereign bonds, and finances in general, to record widespread improvements. Bukele’s miracle in El Salvador filters into the economy.
Since the arrival of Nayib Bukele to the presidency of El Salvador in June 2019, the country has experienced a notable transformation in terms of public security. Historically, this country was known for its high crime rates, which has subtracted whole points from the country’s potential growth for decades. In recent years, El Salvador has achieved a significant reduction in homicide and other crime ratesthanks to a series of security policies implemented by the current government, measures that have also been questioned for their harshness.
JP Morgan analysts released a report this week highlighting that “El Salvador’s economy has experienced significant improvement in recent years which has led us to revise upward our estimate of potential GDP growth, which we now see close to 3% instead of close to 2%. The main driver has been the notable improvement in public safety, which has led to an increase in business and consumer activity, particularly services and tourism,” these experts point out.
the streets San Salvador and other tourist spots in the country have been filled with visitorsespecially Americans and Canadians, who fill the shops, consume and boost the economy of one of the least developed countries in America. “The tourism sector has approximately tripled compared to the pre-pandemic period. In this context, we believe that growth will remain at a similar pace to the trend of 2.8% year-on-year this year and 2.7% the next,” say the JP Morgan economists.
Bitcoin rally leaks to other assets
Improving security is one of the Government’s central bets, which is bearing fruit. But El Salvador is also seeing results in its financial profile thanks to its debt management and, in addition, bitcoin is putting the cherry on top of the good times the country is going through. And all of this feeds back into a virtuous circle.
The Salvadoran debt reflects this. The price of the bond has risen 14.7% since November 5. It has gone from $86.7 to $99.5. That is, it is very close to its nominal value. In the opposite direction, the profitability of the ten-year sovereign security has fallen from 9.68% to the current 7.7%, which reflects the lower risk given to the country’s debt. One of the reasons for this support is the bitcoin rally and that is why the date of the elections in the United States is taken as a reference. In addition, Bukele is balancing the public accounts little by little, which has reduced the deficit and public debt.
El Salvador has been the first country in the world to adopt cryptocurrency as legal tender and has also been accumulating bitcoin reserves for years. This risk asset has appreciated 48% since Donald Trump’s victory in the United States elections, just over a month ago. Nayib Bukele’s country has been one of the big winners of this revaluation and this has ended up filtering into the country’s debt.
Although El Salvador is not going to use its bitcoins to pay debt – at least according to what Bukele has always defended, which is to accumulate bitcoin and maintain the position – its reserves have inflated. That is, the country has much more liquidity and that gives security and confidence. In the hypothetical case that an emergency had to be faced, you could resort to the hundreds of billions of dollars you have earned by investing in bitcoin. Although it does not plan to do so and the benefits have not been collected, El Salvador has more resources to draw on easily and that reassures its creditors.
A few days ago, the president of the country shared in X the evolution of his bitcoin portfolio. He has earned almost $333.6 million since he started investing in the cryptocurrency, thanks to the fact that his profitability in this time has been approximately 120%. The rise of the cryptocurrency market has been especially pronounced since Trump was elected president of the United States, as he has promoted crypto during his election campaign and made strong promises, such as creating a national strategic reserve of bitcoin.
All this has generated a chain movement: Trump has boosted bitcoin and it has ended up boosting El Salvador and its debt. Although cryptocurrency is not the only favorable factor, as Moody’s improved the country’s credit rating just 15 days ago, although this is still in the realm of speculation. The agency explained in the report that the country’s grade has improved thanks to the fact that El Salvador has repurchased a good part of the debt it had outstanding and now its maturities are very affordable until the end of 2029, so its short-term risk has dropped significantly.
Although El Salvador has paid its debt thanks to a bank loan, Moody’s does not consider this to be a mere exchange to deal with a situation of financial stress, quite the opposite. “The country has proven to have access to the market and the low yields of its repurchased bonds support our decision of not evaluating buybacks as an operation to reduce financial stress. Furthermore, we consider that this is only a better liability management strategy since, if it had not been carried out, the government could have also met its credit obligations,” explains the agency. This also takes into account the 2025 budgets that it has presented. the president, who point to fiscal consolidation.
It is true that El Salvador is seeing results thanks to a calculated roadmap, such as improved security or better debt management, but it is also enjoying the moment with cryptocurrencies and their rise. However, its significant exposure to bitcoin and the volatility of the cryptocurrency are a double-edged sword, as the International Monetary Fund (IMF) constantly reminds it. The agency warns of the risk to financial stability that this asset entails.
The country attracts more investors
Not just tourism and bonds: there are more signs of the country’s economic improvement. Migratory flows also reveal a notable improvement in the quality of life of Salvadorans. Nobody wants to live in a poor and insecure country, so for years, El Salvador has been one of the largest sources of population in the region. But this has begun to change. “Related to this, migratory flows to the US have slowed notably in recent years. Behind these trends is the fact that security and growth prospects have improved notably in the country, which has gradually led to lower flows. immigration,” they say from JP Morgan.
The US State Department also highlighted in a recent report the rapid increase in foreign direct investment in El Salvador. These are the foundations to build a better future: “Net foreign direct investment (FDI) flows improved dramatically in 2023. The Central Bank reported that El Salvador attracted $759.7 million in FDI inflows, four times the FDI flows of 2022which marks the highest amount during Bukele’s presidency. National companies have increased investment, mainly in the tourism, construction, wholesale and retail sectors. The Bukele administration has signaled its intentions to liquidate state-owned companies, but it is unclear at this time how and when it will do so,” the US report highlights.
With the objective of stimulating national and foreign investment, the Legislative Assembly of El Salvador modified the Income Tax Law on the 12th March to exempt from income tax all capital inflows, such as remittances, remunerations, loans, funds for working capital, repatriation of capital, profits and dividends, and income from foreign securities and deposits, among others. This is intended to stimulate the economy and unleash growth.
All of the above is based on the miracle of citizen security that has led this country to be the safest in the region in a few years. In 2015, El Salvador had a homicide rate of 106 per 100,000 inhabitants, one of the highest in the world. However, by 2022, this figure dropped to 7.8 homicides per 100,000 inhabitants, evidencing a drastic decrease in less than a decade. The government plans to close 2024 with an even lower rate, estimated at 1.8 homicides per 100,000 inhabitants. This change is largely attributed to the Territorial Control Plan (PCT), launched in 2019, and the exception regime in force since March 2022. These measures have allowed the capture of more than 81,000 suspected gang members, the recovery of territories previously controlled by criminal groups and the hard blows to organized crime.
The perception of security among the population has also improved significantly. for the first timeEl Salvador is among the ten countries with the best perception of security worldwide, according to recent surveys. This transformation has allowed citizens to retake public spaces that were previously considered dangerous, revitalizing community and economic life in various regions of the country.
However, these policies have drawn criticism for alleged human rights violations, including arbitrary detentions and questionable prison conditions. International organizations have expressed concern about the heavy-handed approach adopted by the government, pointing out the need to balance security with respect for fundamental guarantees.
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