It’s not just about gangs: Bukele now faces the challenge of Salvador’s economy

Philippe Yuell does not hide his excitement when he talks about his upcoming visit to San Salvador, the capital of El Salvador. The American lawyer went from being a fan of Bitcoin to practicing as a lawyer in cryptocurrency bankruptcy cases and this experience, for him, is a clear competitive advantage in the only country in the world that has made Bitcoin legal tender.

“I would love to have customers in El Salvador and I am working in that direction,” he said in a video call.

Philippe Yuell does not hide his excitement when he talks about his upcoming visit to San Salvador, the capital of El Salvador. The American lawyer went from being a fan of Bitcoin to practicing as a lawyer in cryptocurrency bankruptcy cases and this experience, for him, is a clear competitive advantage in the only country in the world that has made Bitcoin legal tender.

“I would love to get clients in El Salvador and I am working towards it,” he says in a video call from the office of his firm Diaz Reis in Miami. “I know some Americans who live there and they say it’s really different to live there now compared to a few years ago, because the security level has improved dramatically. The other big hurdle now is economic. “

Salvadoran President Nayib Bukele won election this year and will remain in office for at least the next four years. In the first half of his presidency, he focused on the so-called “war on gangs”, which managed to significantly reduce crime and violence with methods widely criticized for human rights violations. But in the world of big capital, trust and security translate into a better business environment and that’s what Bukele now wants to create. If security was the first hurdle to overcome, economy would be the second hurdle.

This will not be easy to achieve and this is partly because Bukele himself has taken some risks, which have not been well received by investors and even governments abroad. In September 2021, Bitcoin legislation was passed with the idea that citizens could use the digital asset as a currency to pay for everything from real estate to street food. This did not work, according to central bank data, which shows that Bitcoin is marginally used within the country.

Bukele also invested some of the country’s financial reserves in Bitcoin, a risky bet for bondholders listed on the international market. When the price of Bitcoin fell, it was rumored that El Salvador would default on its debt. Today, with asset prices skyrocketing, it is estimated that the value of the Central American country’s international reserves has increased by 62% since the purchase. For now, it’s a success, but the pro-cryptocurrency legislation has not translated into more foreign investment.

El Salvador has lagged behind its peers in emerging markets for 30 years in attracting foreign direct investment (FDI). “This has been attributed in part to extortion and widespread gang-related crime”; An annual report on the country by the US State Department said, “Security reforms have not yet translated into significant new FDI and it is currently unclear how the government will end the state of exception and restore constitutional rights. “

However, the US government warns, the State of Exception enjoys broad public support “and is contributing to improved consumer confidence and optimism about economic conditions.” That is, if there was ever a time for Bukele to capitalize on his achievement, that time is now. His administration has planned several large infrastructure projects and the US government has identified them as potential opportunities for their companies. Projects include improving road connectivity and logistics, expanding airport capacity, and improving access to water and energy as well as sanitation. Given the limited fiscal capacity for public investment, the government wants to use public-private partnerships (PPP) for infrastructure projects.

Bukele, less than a year after taking power, decided to aggressively go into debt to transfer direct support to the population during the COVID-19 pandemic in 2020. According to data from credit risk rating agency S&P Global, this brought debt levels close to 70% of gross domestic product (GDP). The firm upgraded the rating of Salvadoran sovereign bonds late last year after the government managed to refinance its domestic debt in negotiations with national banks, although it still sees it at a level considered “speculative” and further investment. Maintains away from grades.

“Despite the fiscal relief provided by these measures, the country’s public finances remain fragile,” S&P analysts Patricio Wimberg and Omar de la Torre wrote in their report. “El Salvador’s rating encompasses institutional weaknesses, as indicated by long-standing difficulties in predicting policy responses in the context of poor checks and balances, a modest GDP per capita of $5,200, and poor GDP growth expectations.” is moderate due to persistently low investment and productivity.”

The government is in talks with the International Monetary Fund (IMF), which could be a more flexible and less expensive source of financing. For funds, the reduced use of Bitcoin as a fiat currency could represent a greater possibility of lending money to the Central American country, as it reduces the risk of price fluctuations. S&P believes that an agreement will be reached between the government and the IMF this year.

Bukele’s economic bet is on the combination of these two factors, security and cryptocurrency, says Corey Klipstein, executive director of Swan, a Los Angeles-based bitcoin financial services company. The promotion of Bitcoin appears to be part of a marketing push and things are certainly improving in many areas, especially in security to attract foreign investment,” says the businessman.

“A lot of people are moving there, buying real estate, developing homes and condos on the beach and thinking about opening businesses in San Salvador,” says Klipstein. There is a resurgence of interest in country clubs around San Salvador. “That kind of thing and a lot of them are in and around the Bitcoin space, they are fans and believers.”

Lawyer Yuel agrees: “It is difficult to develop an economy and generate confidence, work and achieve good growth rates. “I think there’s a lot of work ahead, but people are excited.”

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