Improved security in El Salvador following the government’s crackdown on gangs could eventually boost investment as firms and consumers gain confidence, according to Moody’s Investors Service.
(Bloomberg) — Improved security in El Salvador following the government’s crackdown on gangs could eventually boost investment as firms and consumers gain confidence, according to Moody’s Investors Service.
There is “significant anecdotal evidence” that crime has dropped in the Central American nation, Moody’s analyst Jaime Reusche said, which could encourage local companies to boost investment.
“The main economic problem in El Salvador’s economy is certainly underinvestment,” Reusche said, in a video call from New York. “If the security situation translates into greater investment, that could certainly be a game-changer for the economy.”
If the safer environment proves sustainable, more cautious foreign investors might follow, though they may be sensitive to “governance” issues, he said.
The government of President Nayib Bukele has jailed tens of thousands of alleged gang members over the last year using emergency powers. The policy is popular, though human rights groups have criticized the lack of due process, the arrest of government critics, the use of torture and the secrecy surrounding the process.
Read more: War on Gangs Gives El Salvador World’s Most Jail Inmates
El Salvador used to be among the world’s most violent countries, and widespread extortion by the gangs was a major brake on economic activity. Retail, tourism and banking are sectors that would benefit from a sustained drop in violence, Reusche said.
As well as crime, the lack of access to credit and financial tools is one of the “biggest impediments to potential growth” in the country, he said.
Moody’s projects El Salvador’s economic growth rate will be 1.7% this year, before accelerating toward its full potential rate of around 2.5%.
US Housing
With more than 2 million Salvadorans living in the U.S, the nation’s economy depends heavily on remittances, which account for more than a quarter of gross domestic product.
However, these inflows have started to decelerate amid a slowdown in the U.S. construction sector where large numbers of migrants work, Reusche said. El Salvador remittance flows are more strongly correlated with U.S. housing than with the broader U.S. economy, he added.
Moody’s has cut El Salvador’s rating three notches since Bukele took office in 2019, to Caa3, meaning the country has “very high credit risk, poor standing.” However, the agency raised its outlook to stable from negative following a January bond maturity payment of $604 million and a more favorable amortization schedule in the near term.
Read more: El Salvador’s Credit Outlook Raised to Stable by Moody’s
The government still lacks access to global credit markets and faces high financing needs largely funded by expensive, short-term domestic debt.
“It’s still structurally a very weak credit,” Reusche said. “It’s going to take quite a bit to turn this around.”
El Salvador adopted Bitcoin as legal tender alongside the US dollar in 2021. However, “use is so limited that for us it really hasn’t led to any major concerns either in the financial sector or for the broader real economy,” Reusche said.
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