Caribbean & Central America - April 2021

Nuevas Ideas (NI), the party of President Nayib Bukele, will have an unprecedented two-thirds majority in the 84-member national assembly following the 28 February legislative elections, but Bukele’s economic plans could be constrained by the country’s precarious economic situation.

The final results of the election show that when the new legislature takes up its seats in May, President Bukele will enjoy the support of 61 deputies from NI and its centre-right ally, Gran Alianza por la Unidad Nacional (Gana). This gives Bukele the two-thirds majority needed to approve the national budget, international loans, and appointments to key state institutions. Bukele will now be able to focus on implementing his 2019 electoral manifesto, ‘Plan Cuscatlán’. This includes the security plan ‘Control Territorial’, which he has started implementing and which has proven popular with voters, as well as universal healthcare, an ambitious infrastructure development plan.

Pensions are also a hot topic. There will be a rise in the monthly minimum pension payment from US$207 to US$304 this year, which will add US$88m to the cost of the system, on estimates from the Salvadorean association of pension fund administrators (Asafondos). This will be paid for by a redirected loan, rather than through pension contributions. A local economist, Luis Membreño, told national daily, La Prensa Gráfica, that the decision was political and did not consider the effect on the sustainability of the current pension system, which has only been in place since 2017.

Trade unionists complain that the pension system, which is currently manged by private pension fund administrators (AFPs), has yet to translate into benefits for workers and they are calling for the system to be brought back under state management. Both Bukele and Economy Minister Alejandro Zelaya have promised “integral” pension reform this year, which Zelaya said would benefit pensioners, the state, and AFPs, without giving any further details. However, NI deputy-elect, Suecy Callejas, said the aim is to move to a mixed pension system with greater state involvement, but that studies need to be undertaken in order to come up with a “more responsible” system.

Aside from these items on Bukele’s legislative agenda, his government also continues to support vulnerable Salvadoreans affected by the impact of the coronavirus (Covid-19) pandemic through its emergency health programme (PES). On 5 April the Bukele administration announced that food and medicine distribution, which started in May 2020, would continue, with 70,000 packages containing basic items handed out daily.

There is a lot of demand for the programme, with an estimated 478,000 Salvadoreans set to fall into poverty as a result of the pandemic, according to a 24 March report from the Inter-American Development Bank. This translates to an increase in the country’s poverty rate from 28.5% to 35.9%. While there is undoubtedly a need for government support, the PES represents another drain on public finances, which are already in a perilous condition.

A precarious situation

In a report released on 7 January, international credit ratings agency Fitch Ratings raised concerns over El Salvador’s finances, projecting that the country’s fiscal deficit would reach 8.2% of GDP this year. In a previous 2 March report, Fitch forecast that the debt-to-GDP ratio would rise to 94.8% this year, up from nearly 89.4% in 2020 and 70% in 2019. The Central American institute for fiscal studies (Icefi), a Guatemala-based think tank, has also raised concerns over El Salvador’s public debt. In a 11 March report, Icefi warned that the situation has been “particularly concerning” for various years, and debt could reach 100% of GDP in the next few years unless there is “some change in public finances in the short term”.

Both Fitch and Icefi highlighted the hitherto gridlock in the outgoing legislative assembly, which has been dominated by the opposition right-wing Alianza Republicana Nacionalista (Arena) and left-wing Frente Farabundo Martí para la Liberación Nacional (FMLN), as a reason for financial difficulties. In its March report, Fitch said this limited the government’s ability to tap external funding from either private or official sector creditors, which requires approval by a two-thirds majority in the assembly, resulting in an over-reliance on domestic market borrowing to meet high government funding needs, pushing borrowing costs higher. Icefi said the recent election result could consequently facilitate the approval of external borrowing and of a fiscal adjustment.

In an interview with newswire Reuters, published on 4 March, Zelaya said that financing from international multilateral lenders would make El Salvador’s debt and public spending sustainable. He suggested that one option could be signing a new agreement with the International Monetary Fund (IMF), telling Reuters that the government is looking to secure some US$1.3bn in financing through a 36-month Extended Fund Facility, similar to that announced for Costa Rica [EB-21-02]. Zelaya also told Reuters that for 2021 “we need financing of around US$2bn, including the short-term debt management plan” (see sidebar).  

However, Fitch also signals caution, pointing out that Bukele “has yet to set out a medium-term fiscal strategy and his administration’s plans for a supplementary 2020 budget would have reduced consolidation commitments even before the pandemic”. It adds that securing external funding via an IMF programme would be contingent on commitments to fiscal adjustments, estimated at 3% of GDP before the pandemic.

With the latest forecast from the World Bank predicting that El Salvador’s GDP will grow 4.1% this year, following a 8.6% contraction in 2020, a local think-tank, Fundación Salvadoreña para el Desarrollo Económico y Social (Fusades), has suggested that one factor that could help to drive growth is the huge US$1.9trn stimulus package approved by the new US administration led by President Joe Biden. Fusades estimates that this could boost El Salvador’s GDP by 0.9%-1.7% by increasing US demand for Salvadorean exports. This underlines the extent to which the health of smaller economies such as El Salvador will rely on a strong global recovery from the pandemic.

Another potential solution for Bukele’s government could be condonation of debt, as proposed by the United Nations Development Program (UNDP) in a report released on 1 April. Published ahead of the April 2021 WB-IMF Spring Meetings, the UNDP report entitled ‘Sovereign Debt Vulnerabilities in Developing Economies’ calls for “bold new mechanisms” to help 72 vulnerable countries - which include Costa Rica, Honduras, and Nicaragua - address debt distress. Although not included in the UNDP list, the Bukele government could make a case to be extended this benefit given that its situation is considered similar to that of its neighbours.

While external factors could prove important in deciding El Salvador’s future, Bukele’s newly strengthened hand in the legislature leaves him much better placed to steer the economy in the direction of his choosing to try to find a solution to the debt problem.

• External financing

While no agreement has yet been reached with the IMF, Zelaya told Reuters that the multilateral organisation could potentially disburse up to US$450m this year, on top of prior commitments of US$250m from the Inter-American Development Bank; US$200m from the World Bank; and US$600m from the Central American bank for economic integration (BCIE).