Will There Be A Salvadoran Miracle?

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GCaM Greater Caribbean Monitor
February 23, 2024

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In this issue, which is the last of the year, you will find:

Títulos en este boletín

•Will There Be A Salvadoran Economic Miracle?

•Dominican President Luis Abinader Poised for Reelection

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•Will There Be A Salvadoran Economic Miracle?
647 words | 3 minutes reading time

Nayib Bukele was re-elected with 84.65% of the vote. There are those who talk of fraud in the legislative elections. This, in truth, is an immaterial concern. The results have been certified: Nuevas Ideas, Bukele’s party, now controls 54 of 60 seats in the legislature; allied parties will provide another three seats. 

  • ARENA, the formerly hegemonic right-wing party, will have to settle for two seats. The FMLN, the party of the Salvadoran left, has disappeared from the Legislative Assembly.

  • According to government data, the Salvadoran homicide rate stands at around 2.4 per 100,000 inhabitants, second only to Canada in the Americas. This largely explains Bukele’s popularity.

  • With the gang issue settled, the economy now becomes a priority. Bukele, who campaigned without an official platform, is no stranger to this; he talks a great deal about his tourism and infrastructure initiatives.

Data. El Salvador’s economy is patently mediocre. The IMF projects GDP growth of 1.9% this year, with inflation at 2.4%. Intraregional comparisons are appropriate: Guatemala, which can hardly boast of a booming economy, will grow 3.3% this year; Costa Rica, meanwhile, foresees a figure closer to 4%.

  • In 2021, El Salvador exported $6.86 billion and imported $14.3 billion. This immense trade deficit is even more pronounced than in the rest of Central America, which has a tendency to consume more than it produces.

  • Naturally, the difference is made up with capital inflows. In El Salvador, a country with very low FDI, remittances represent 26.7% of GDP and are the main source of hard currency—an immense risk in light of probable U.S. restrictions on immigration.

  • The country is also burdened by its debts, with a debt-to-GDP ratio of 80.9% of GDP—by far the highest in Central America. The country is negotiating a $1.3 billion loan with the IMF. Bukele may convince the IMF, which has already heaped praise upon him, but certainly not before committing to austerity and unpopular budget cuts.

Yes, But. Fatalism is unwarranted. After a troubled first few years, Bukele appears to have reached a kind of understanding with Washington. He has shown some negotiating skills with China, which has promised “non-refundable cooperation” efforts of some $500 million.

  • The newfound sense of security has also improved the fortunes of the country’s thriving, although still relatively small, tourism industry. Last January, for example, 351,000 tourists entered the country. This represents a 35% increase compared to 2023.

  • In general terms, there is a 32% increase in foreign tourist arrivals. Most of them are Americans, who spend an average of $1,096 during their stay. Blustering attempts to entice cryptocurrency investors may prove futile, but there is an observable tourism boom.

  • Although it is not often mentioned, El Salvador has ample gold deposits. The north of the country, adjacent to the Guatemalan department of Jutiapa, has gold, but the country proscribed all metal mining in 2017. Rumor has it that Bukele is seeking to reverse the ban.

The Future. Bukele will steer the ship of state until at least 2029. His supermajority in the Legislative Assembly may allow him to remain in power for many more years, provided he remains popular. This will largely depend on his economic performance. If stagnation continues, he will suffer considerable wear and tear.

  • There is still no “Salvadoran miracle.” The economy presents middling, if not entirely disastrous, results. For the Salvadoran president, this is partly an evil inherited from previous governments.

  • There are those who argue that Bukele has harmed legal certainty. This is true: the government does not apologize when it resorts to “unusual” methods; on the contrary, it deems them necessary in light of the severity of the country’s plight. Nonetheless, security is inherently valuable and could draw new investments.

  • Bukele is fond of opacity and secrecy. It is difficult to parse his proposals, but his desire to invest in infrastructure is evident. His willingness to cooperate with Washington on immigration will earn him investments, to which one must add those already earmarked by the Chinese.

What We’re Watching

China circumvents US tariffs by shipping more goods via Mexico [link]

Claire Jones, Christine Murray, and Keith Fray, Financial Times

Chinese firms, especially carmakers, are increasingly investing in their Mexican operations, which benefit from privileged access to the U.S. market. USMCA, the successor to NAFTA, bans direct transshipment, meaning goods must undergo some sort of assembly in Mexico; otherwise, they must pay the standard tariffs on Chinese goods. Beijing is evidently running a deliberate strategy, and Mexico is not the only beneficiary: Vietnam, Singapore, and the Philippines—all U.S. darlings—are increasingly serving as intermediaries for U.S.-China trade. From a Chinese perspective, this is not out of the ordinary: Japanese auto parts giant Yazaki does the same, building factories in Latin American countries with preferential access to the U.S. market. For Washington, this evidences the need for more stringent rules of origin. Its purported decoupling from China has not been as effective as claimed; indeed, plenty of Chinese firms, like Shien and Temu, have no need for intermediary, since their low-priced items benefit from de minimis tariff exemptions.

Guatemalan President Looks To Turn EU Backing Into Investments [link]

Barron’s (with AFP)

Bernardo Arévalo, Guatemala’s new president, has embarked on a European tour, meeting with Emmanuel Macron, Felipe VI, and Volodymyr Zelensky. He still enjoys the solid backing of Washington and Brussels, which are providing technical assistance and funding consultants to advance the president’s legislative agenda. Arévalo has secured a commitment to invest €50 million in Petén, Guatemala’s northernmost department. Apart from investments, Arévalo wishes to negotiate the finishing touches of the EU-Central America Association Agreement, which has been provisionally applied since 2013.

First Quantum Minerals announces capital restructuring to reduce debt [link]

Divya Rajagopal, Reuters

Until recently, Toronto-headquartered First Quantum Minerals operated the Cobre Panamá mine, which made up 5% of Panama’s GDP and 75% of its goods exports. Using the Panama-Canada FTA’s arbitration mechanism, the firm now asks Panama for $20 billion in compensation, that is, two-thirds of the government’s 2024 budget. First Quantum has a fair chance of winning, since the mine’s closure, although widely supported by the populace, almost certainly violated contractual provisions. That said, the company is discreetly awaiting the outcome of Panama’s presidential election, scheduled for May 5; it would prefer to reach an agreement without arbitration, especially if it is allowed to restart operations. This remains unlikely, but the Panamanian political panorama has already been disrupted by the Supreme Court’s refusal to allow immensely popular former president Ricardo Martinelli to run. Martinelli is now holed up at the Nicaraguan embassy in Panama City.

Japan aims to export metro railway tech to Dominican Republic [link]

Riho Nagao, Nikkei Asia

Beyond competing with European manufacturers like Siemens and Alstom, the Japanese government is hoping to use its export-oriented firms to counteract Chinese influence in Latin America, where both Mexico and Chile have already deployed Chinese trains. Tokyo is offering Santo Domingo a $665 million loan to purchase the rolling stock. The move comes scarcely a few days after Yazaki agreed to invest $90 million in the country.

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•Dominican President Luis Abinader Poised for Reelection
671 words | 3 minutes reading time

Last Sunday, the Dominican Republic held municipal elections. The tallying of votes proceeds somewhat slowly, but preliminary results suggest that the ruling Modern Revolutionary Party (PRM, center) achieved a majority in at least 30 of 32 provinces; of 158 mayoralties up for grabs, the opposition won a mere 23.

  • The PRM managed to defend its hold on the capital and also won in all the municipalities of Greater Santo Domingo. The PRM-led landside was slightly overshadowed by the high abstention rate, which surpassed 53%.

  • The Dominican Liberation Party (PLD, center), which held the presidency for 16 years in a row, lost its last stronghold: Santiago de los Caballeros, the country’s second-largest city.

  • José Ulises Rodríguez, of the PRM, carried the city with 61.68% of the vote. Outgoing mayor Abel Martínez is the PLD’s presidential candidate, making the loss of Santiago particularly damning.

Between the Lines. Abstention is not necessarily lamentable: municipal elections in the Dominican Republic are hardly known for their high turnout. This year’s turnout was comparable to the 49.10% recorded in 2020. A considerable rebound can be expected for the general election on May 19.

  • The most concerning aspects were the incidents in the country’s interior, especially in Dajabón, where the opposition appears to have won by a single vote. Disputes were recorded between PLD supporters and the Military Police.

  • The opposition is now devoid of influence at the local level. Abel Martínez, its most visible leader, and former president Leonel Fernández, leader of the People’s Force (FP, center-left), must now focus not on clinching the presidency, but on saving their congressional seats.

  • The most important conclusion of these elections is that President Luis Abinader will likely achieve reelection in three months’ time. In his second term, he will enjoy immense territorial power. Abinader, a renowned businessman, is thought of as a mild-mannered moderate; he is unlikely to abuse this power.

Panorama. Dominican democracy is quite particular. So far this century, the country has been wont to reelect political parties for long periods of time. Fernández, former leader of the PLD, was president from 1996 to 2000 and then from 2004 to 2012, when he was replaced by Danilo Medina, with whom he shared a political party.

  • The country’s leaders are fond of denying it, but Dominican politics lacks major ideological cleavages. Parties are big-tent forces. Almost all relevant figures agree on maintaining the current pro-business economic model. Expanding tourism and countering Haitian immigration are consensus viewpoints.

  • In the last decade, party splits have revolutionized the country’s bipartisan system. The PRM emerged from a schism within the Dominican Revolutionary Party (PRD), for decades one of the country’s two largest parties. The much-diminished PRD is now a minor partner in the PLD’s electoral coalition.

  • Likewise, the FP is former president Leonel Fernández’s personal project, after failing to dominate Medina as Putin did with Dmitri Medvedev. In Dominican political circles, it is said that Fernández’s main ambition is to consolidate the party and bequeath it to his son.

The Balance. This result serves to reinforce the polls that have been published ahead of the presidential elections. Specific figures vary, but almost all of them coincide in saying that Abinader will obtain over 50% of the vote, a large enough margin to avoid a run-off.

  • The key, in any case, is the economy. Economic growth slowed in 2023, with GDP increasing by just 2.3%. Having reached its inflation target, the Central Bank is likely to reduce interest rates in 2024, thereby making investment cheaper. This will undoubtedly heat up the economy.

  • The country has a potential growth rate of 5.5%, well above the figures seen in Central American countries. Given a more promising economic outlook, the PRM’s second term could be one of accelerated growth. The IMF is of the view that the Dominican Republic will attain advanced economy status in the next 40 years.

  • The Dominican government shows how to dominate politics without introducing revolutionary changes. Abinader and his party will remain in power due to their technocratic statesmanship, which is perceived as a considerable improvement over the PLD’s corruption scandals.