The State Department noted that El Salvador faces no threat of imminent default, but its fiscal situation remains fragile and with a high level of debt.
The Nayib Bukele Administration has prioritized the strengthening of the economy in large – although fiscal risks continue due to its high level of debt, the U.S. State Department said in statements on El Salvador’s investment climate.
The investment profile reviews the advantages of El Salvador to become a destination for foreign capital, as well as the dynamics of the economy, the business climate and fiscal conditions.
The latest publication noted that the Bukele government has prioritized job creation and the strengthening of the economy after improving the security situation of citizens.
The report mentions that El Salvador seeks to attract investments with elimination of bureaucracy, tax incentives, automation of government services and acceleration of the digital transformation of the public apparatus.
Geographical location, the predominant use of the dollar, the situation of – drastically improved security – the trade agreement with the US and the recent improvements in the business environment – make El Salvador an investment destination, the report adds.
Improved security is attributed to the emergency regime, which has been in place since March 2022 and has jailed more than 75,000 suspected gang members. This not only guarantees a “wide support” to the government, but also increases consumer confidence.
In El Salvador’s rosary of advantages, the State Department included the enactment of the law that exempts income tax from all capital inflows. Prior to this reform, money flows exceeding $150,000 were subject to a rate of 20 per cent.
Bukele has proposed “several major infrastructure projects that would provide opportunities for U.S. companies, including connectivity, logistics, airport, energy and water works.
Fiscal situation, the greatest fragility
After the government faced financial turbulence in 2022, the measures implemented by the Ministry of Finance in the repurchase process and the change of profile in short-term debt maturities seem to have an effect on the market: Salvador no longer faces a threat of imminent sovereign default, Washington added.
However, the State Department stressed that the fiscal situation remains fragile and with significant amounts of sovereign debt that expire in 2027.
Owing to low credit ratings, restricted access to the international debt market has perpetuated liquidity constraints and limited sustainable economic growth.
Washington recalled that in August 2023 the government resumed talks with the International Monetary Fund (IMF), two years after the 2021 talks failed. Discussions are ongoing, but the negotiating table holds the issue of bitcoin and its risks to the Salvadoran economy.
In the absence of an agreement with the IMF, the GOES is likely to have to continue with unorthodox measures such as a broad indebtedness of the pension system to finance the government and pay the debt, the State Department added.
Contrary to the IMF’s request to eliminate bitcoin as a legal tender currency, the report noted that the Legislative Assembly enacted a law on the issuance of digital assets that pretend that the country is “less vulnerable to illicit finances.”
The report also includes comments from companies that the government has enacted laws and regulations without warning or receiving comment.
This article has been translated after first appearing in Diario El Mundo