Foreign investment Under Bukele Plummets to 44% of Sanchez Cerén’s

Photo of author

By LatAm Reports Editor

Experts point to legal uncertainty and lack of public policies beyond the Bitcoin’s commitment to the main factors of the fall in Foreign Direct Investment (FDI). The decrease in crime does not compensate for the mistrust generated by the current administration.

While in El Salvador, official crime-related figures have plummeted in the administration of now licensed President Nayib Bukele over that of his predecessor, Salvador Sánchez Cerén, what is expected is that many more investors will welcome to bring their money to invest in the country.

But it is undeniable, according to data from the Central Reserve Bank (BCR), that Foreign Direct Investment (FDI) in El Salvador has also collapsed: in the almost 5 years of Nayib Bukele’s government, this figure has been less than half that in the previous presidential term, specifically, only 44%.

If you review the net flow of FDI in the first 17 quarters of the Bukele administration (July-September from July to September-September 2023, the last available data) and compared to the last 17 quarters of Salvador Sánchez Cerén, it is possible to verify that Foreign Direct Investment went from $2,825.66 in the period of the ephemeral to only $1,247.28 in the current management.

Logic indicates that, to greater security, more investment will have a country, but that is not being fulfilled in El Salvador. What have been the causes?

For economist Rafael Lemus, one of the easiest to point out is 2020, the year of the Covid 19 pandemic, in which the national economy was closed. And longer than in other Central American countries.

However, this explanation houses a paradox: in 2020, the balance sheet of the four quarters was $293.44 million, with an economy that had to be frozen to avoid further contagion. But 2022 FDI was still lower, with negative figures of $99.1 million recorded. That is, Salvadoran citizens and companies invested almost $100 million abroad more than they brought from their international investors from their countries.

From May 1, 2021, institutionality was dismantled in El Salvador, says Lemus, referring to the inauguration of the majority of New Ideas in the Legislative Assembly. On the same day, the deputies dismissed from office the judges of the Constitutional Chamber of the Supreme Court of Justice and the Attorney-General of the Republic.

When a foreign entrepreneur sees that, he says: Here they have dismissed judges, they have removed the prosecutor. What guarantees me that they can’t take away my property, that they won’t initiate unfair criminal proceedings? That’s why they decide not to invest in this country, because here the Constitution and the laws are not respected, Lemus says.

The cause that most affects the business climate in El Salvador is, therefore, legal uncertainty, which was consolidated with the seizure of Nayib Bukele from the three branches of the State, through its docile Legislative Assembly.

Let it be said that since May 1, 2021 the investment climate in El Salvador has plummeted has been supported in official figures. According to data from the Central Reserve Bank, FDI in the first two quarters of that year was $413.89 million, a healthy amount. However, the trend reversed in the last six months of that year, when FDI was negative, of -$99.42 million. And the first quarter of 2022 was catastrophic, when it reached -$226.32 million.

Security goes beyond physical security. Even when there was a war, investment was still recorded. It is legal certainty that the investor values the most. The mistrust that there will be no entity that can be neutral to resolve conflicts between company and government scares any investment,” says economist Luis Membreño.

Other factors

However, this is not the only factor in having these numbers so discouraging, according to Otto Rodriguez, who was vice president of the Central Reserve Bank (BCR) between June 2019 and April 2021. Another important element is the design of economic policies with credibility and consistency.

In El Salvador, he says, all reforms are leading to attracting a single type of investor, which is that related to cryptocurrencies, especially Bitcoin. And, for Luis Membreño, this is not precisely a kind of investor who can grow an economy.

The bet on bitcoiners has not generated what the government expected. It’s logical. They don’t invest in production. They are people accustomed to expecting a speculative return on their investments. And to have high profitability in a short period of time. And El Salvador is not able to give it to him, says Membreño.

For Otto Rodriguez, there is another set of factors that generate mistrust, which are related to a government that does not reach money. For example, public spending has increased by almost 50 per cent over its predecessor when the economy has grown by only 30 per cent. That forces this administration to borrow rapidly. El Salvador has also diminished its international reserves. Hence, the assessments carried out by the International Monetary Fund are not the most promising.

All this generates noise… A country’s cover letter to foreign investors is the information of the IMF, from the rating agencies. And everything indicates that El Salvador is a risky market, Rodriguez says.

El Salvador, on the other hand, is a country that grows only on the basis of remittances, to the Salvadorans who leave. And it is not one that invests in productive works, beyond tourism and entertainment, economists agree. Entrepreneurs therefore do not see clearly what they could invest within our borders.

Do we see countries that, although they have political crises, continue to grow in their economy, such as Peru or Guatemala. That’s because your economy works well. In El Salvador, the two things are distorted, politics and the economy. And the biggest problem is the prospects. This is not seen to end in the short term, with a re-election in the making, Otto Rodriguez says.

El Salvador is the least FDI country in the region, according to data from the Economic Commission for Latin America and the Caribbean (ECLAC). And it’s a long way from your neighbors. Especially Costa Rica, which is the most successful country in Central America in this area.

If a comparison is made by both countries in the period 2019 to 2022, it is possible to note that the country’s FDI ($2.088 million) was almost 11 times that of El Salvador (EUR $1.115 million).

In 2023, Costa Rica was the country in the world with the largest Foreign Direct Investment as a percentage of its GDP, reaching 12.7 %, followed by Northern Macedonia, with 11.9 per cent, and the United Arab Emirates, with 11.1 per cent.

This article has been translated from the original which first appeared in El Salvador