A Pivotal Moment for El Salvador

Don't be distracted by the migrant caravans - El Salvador has been making steady progress and elections in 2019 could be the catalyst to fix the country. Eduardo Arcos, Control Risks's El Salvador Analyst investigates the impact for investors...

A dramatic 2018 has paved the way for next year’s El Salvadorian elections to herald in a new era for the country. On the foreign policy front, increasingly hostile relations with the US under President Donald Trump have jeopardised years of co-operation. Meanwhile, El Salvador’s recent decision to switch diplomatic relations from Taiwan to the People’s Republic of China further strained relations with Washington, which regards Beijing’s plans to increase its economic and political clout in Latin America with suspicion.

Internally, two landmark corruption cases involving former presidents have raised expectations that the country is serious about improving its anti-corruption credentials, especially coming in the wake of widespread corruption scandals sweep neighbouring Guatemala and Honduras. Moreover, National politics have also changed significantly over the past year. With the February 2019 general election approaching 2019 could mark the first time since the end of the country’s civil conflict in 1992 that a candidate not from the FMLN or ARENA wins the presidency. Former mayor of San Salvador Nayib Bukele has credible chances of emerging victorious in 2019. Bukele is a widely popular political figure given his outspoken manner and his criticism towards the political establishment. His principal contender is prominent businessman Carlos Calleja of ARENA, who remains popular among the country’s business class and conservative sectors of the electorate.

"the country is serious about improving its anti-corruption credentials…"

Of course, challenge still remain. Gang-related violence remains pervasive and continues to represent the primary hurdle for businesses. Meanwhile, the country’s economic growth rate remains anaemic, with the expected 2.3% expansion for 2018 below that of neighbouring Guatemala and Honduras. As a result, improving economic prospects, fighting violent crime and combatting corruption will be the main topics of the general election.  There is reason for optimism that these won’t just be empty campaign promises, as the country is better placed to combat these perennial issues than it has been in decades.

For investors the rewards could be interesting. Particularly in sectors that have yet to exploit the potential of economic integration with Guatemala and Honduras, such as transport, logistics and energy.

Washington and Beijing

Salvadoran relations with Washington have experienced a series of shocks during 2018. In January, the Trump administration’s decision to terminate the Temporary Protected Status (TPS) scheme for Salvadoran immigrants living in the US surprised the Salvadoran government, particularly as President Salvador Sánchez Cerén had called for the extension of the TPS in late 2017. Salvadorans make up the largest Central American community in the US, with an estimated 195,000 living in the country under the TPS scheme, which excludes second-generation Salvadorans. The US decision means that Salvadorans benefitting from the TPS scheme will have until September 2019 to leave the country or to obtain legal residency. The deportation of large numbers of Salvadorans back to the country could have serious repercussions, particularly as opportunities in their home country remain scarce while tens of thousands of Salvadoran families rely on remittances sent from the US.

Therefore, it comes as no surprise that the administration of Sánchez Cerén has looked across the Pacific to compensate for Washington’s hostility. In August, El Salvador became the latest Latin American country to switch diplomatic recognition from Taipei to Beijing. Sánchez Cerén quickly stated that the establishment of relations with China would provide important economic opportunities for El Salvador, as it plans to establish tax-free zones to boost investments. One month later, Washington recalled its Chiefs of Mission to El Salvador, the Dominican Republic and Panama, to discuss ways in which the US can support strong, independent, democratic institutions in the region amid these countries’ decision to no longer recognise Taiwan.

The immediate benefits of El Salvador’s relationship with Beijing will be limited. Although developing countries across the world have benefited from Chinese investment and loans, that doesn’t mean El Salvador can expect a sudden influx of investments from across the Pacific. Moreover, El Salvador must preserve cooperation with the US, upon which it remains dependent. Nonetheless China could become an important source of investment in the medium to long term.

Dealing with corruption

Unlike neighbouring Guatemala and Honduras, El Salvador does not have an internationally-backed anti-corruption institution. Sánchez Cerén has reiterated throughout his term that national institutions are capable of effectively investigating and prosecuting politicians involved in corruption schemes. Although national and international observers have been sceptical of the country’s anti-corruption credentials, two notorious cases give credibility to the local efforts. In September, former president Antonio Saca was sentenced to ten years in prison for corruption and embezzlement charges after pleading guilty to diverting over $300million worth of public funds. A few days after, the Attorney General’s Office demanded a judge to request the extradition of former president Mauricio Funes to face corruption and money laundering charges amounting to over $350million. These cases are unprecedented for El Salvador, as it involves former presidents of the two principal political parties in the country- the Farabundo Martí National Liberation Front (FMLN) and the National Republican Alliance (ARENA). Moreover, they are reflective of improving capabilities and capacities by the Attorney General’s Office, currently led by Douglas Meléndez, who is generally well-regarded. If, as expected, the next election is won on a tough anti-corruption stance, the incoming president can be expected to support the efforts of the Attorney General’s Office.

Less murders

Gang-related violence remains the most pressing issue for Salvadorans and businesses in the country. Since the 1990s El Salvador’s gang problem has led this small Central American nation to become one of the most violent places in the world. The country’s two main gangs are the MS-13 (Mara Salvatrucha) and the Barrio 18, both of which have a myriad of allied factions. The administration of Sánchez Cerén has implemented a hardline security strategy with mixed results. Homicides fell by 11% from January to September this year, compared to the same time period in 2017. If this trend continues, 2018 could become the third year in a row with declining murder rates. This fall is partly down to the success of the current security strategy, which includes strict security measures in prisons to impede communications between inmates and gang members. Nonetheless, much remains to be done in El Salvador’s long battle against gangs. The country’s justice system remains under-resourced and prone to corruption and infiltration, particularly at the local level. Moreover, local politicians are known to establish pacts with gangs, particularly during campaign periods - in order to stage political rallies in neighbourhoods or areas under control of gangs. And regardless of whoever wins in 2019 strengthening the capacities of security forces, particularly the National Police (PNC), will remain challenging due to strained government finances.

As difficult as El Salvador’s challenges are, it also has several factors in its favour. Central America’s strategic location, cheap workforce and favourable demographics make it a popular site for near-shore manufacturing and service centres aimed at the US market. Moreover, compared to its neighbours, El Salvador has shown relative political stability in recent years. Moreover, the country could greatly benefit from a surge in Chinese investments in vastly underdeveloped sectors such as infrastructure and energy, in the context of increasing economic integration among Central American nations. With the right winner in 2019 the country is better placed than it has been in decades to turn its fortunes around.