Caribbean & Central America - December 2020

On 30 September, the Salvadoran government led by President Nayib Bukele presented its proposed 2021 national budget, which is unlikely to be approved by the legislature given concerns about the huge rise in spending.

The proposed budget is for US$7.45bn, up 16% on the US$6.4bn approved for 2020 and would be the largest in the country’s history. It includes big spending increases in education, health, security, and defence. But analysts say it relies on unrealistic forecasts. On 22 October the Guatemala-based economic think-tank, Instituto Centroamericano de Estudios Fiscales (Icefi), warned that the increase in social spending is “uncertain” due to an “exaggerated over-estimation of tax income”, while on 6 October international credit ratings agency, Fitch Ratings, said that implementing the proposed budget in full would “increase pressure on El Salvador's ‘B-’sovereign rating from deteriorating debt sustainability metrics and financing constraints”.

Finance Minister Alejandro Zelaya says the budget aims to bring about a “Salvadoran miracle”. However, Zelaya has admitted that it is difficult to envisage it passing the opposition-controlled legislative assembly - an assessment with which Fitch agrees. The ratings agency emphasised that “short-term borrowing has already hit record levels, and the approach of next year's legislative elections may complicate efforts to secure additional multilateral support”. Fitch forecasts that El Salvador’s GDP will contract by 8.2% in 2020 and expects its fiscal deficit to come in at 11% of GDP, up from 3.1% in 2019. The proposed budget “would imply a 7.5% of GDP fiscal deficit, debt-to-GDP of 94%, and financing needs of nearly US$1.85bn”, which Fitch believes would be challenging to meet. 

Fitch had already raised concerns over El Salvador’s debt sustainability in July, when the government announced a US$1bn bond issue. “The high interest rate on the recent bond (issued at 9.5%) and limited domestic financing options underscore how a sharp rise in debt, higher interest burden and continued financing challenges raise questions around debt sustainability, especially in the absence of concrete strategies to consolidate fiscal accounts in the coming years” Fitch noted. El Salvador’s debt to GDP ratio has increased from 58.8% in 2011 to 93.2% in 2020, according to Icefi, which projects that the proposed budget would push that figure to 95.6%.

Local analysts have also raised concerns over the budget. Carmen Aída Lazo, an economist and dean of the Escuela Superior de Economía y Negocios (ESEN), a private, non-profit university in El Salvador, has pointed out that almost 20% of the planned spending is allocated to servicing public debt. Other criticisms include projections that don’t take into account the impact of the coronavirus (Covid-19) pandemic on public finances, and a reliance on a strong economic recovery in 2021. Icefi believes it is more likely that an economic recovery will be slow, and that public finances will be affected for longer.

Meanwhile Rommel Rodríguez, an economist at Fundación Nacional para el Desarrollo (Funde), the local branch of international anti-corruption NGO Transparency International, also warned that the spending plans fall foul of the constitution, with planned funding for the judicial branch falling short of the level required by law. Rodríguez says that the judiciary should be allocated at least 6% of budget revenue as per the constitution but under the current proposal it would receive only US$290m which is short of this.