Market News

By Matthew Bristow

(Bloomberg) -- The gang members who used to prey on the coffee growers of the Balsamo mountain range are all gone — jailed, shot dead, or on the run under the security crackdown that made El Salvador’s Nayib Bukele among the world’s most popular leaders. 

With the gangs dismantled and their extortion rackets no more, a huge obstacle to development has been lifted, and the farmers of the region’s rich volcanic soil should be cashing in on a 75% rise in the world coffee price this year. But it’s not working out like that. 

Since Bukele won the presidency in 2019, the economy has grown less than those of regional neighbors Guatemala and Nicaragua while Honduras overtook El Salvador’s gross domestic product last year for the first time in more than three decades. The fact is, although the 96% plunge in the murder rate sparked a housing boom and a surge in tourism, it has so far failed to unleash a broader economic expansion. 

“We’re not really seeing the peace dividend in terms of a rebound in economic activity,” former central bank president Mauricio Choussy said in an interview. “The economy is this government’s Achilles’ heel.”

The Central American nation of 6.4 million, known today for surfing, gourmet coffee, and for having bet hundreds of millions of dollars on Bitcoin, has been held back for decades by inadequate infrastructure, a poor school system and low levels of investment.

But Bukele’s aides believe they’re addressing those issues and are poised to benefit from tailwinds that take the country down the path to prosperity, including port expansions, a new airport, and sovereign rating upgrades and falling borrowing costs ahead of an expected $1.4 billion deal with the International Monetary Fund. Bukele also said this month that he wants to lift a ban on mining, to take advantage of the nation's reserves of gold and other metals.

Then there’s Bukele’s warm relationship with Donald Trump, the crypto-backing US President-elect. How those ties play out might help determine whether the country can transform security gains into economic ones, fix decades of weak productivity growth and rein in the suffocating level of government debt.

“Like the patient who beat cancer and now wants to fix his heart problems, the country has cured itself of the gangs and now wants to heal its bad economy,” Bukele said in June, in the inaugural address to his second term after taking almost 85% of the vote. 

Bukele got a rapturous reception when he attended the Trump-allied Conservative Political Action Conference near Washington in February. CPAC Chairman Matt Schlapp returned the favor by being present at Bukele’s inauguration, hailing his victory as evidence that “conservatism is gaining traction worldwide and the countries that are embracing conservatism are changing for the better.”

The US, he said, “is going to be helping the people of El Salvador very soon.”

Trump may prove to be a mixed blessing for Bukele’s administration. His pledge to curb migration and deport large numbers of people from the US could hit El Salvador hard: There are an estimated 750,000 undocumented Salvadorans in the US, forming the largest unauthorized immigrant population after Mexicans.

Since remittances account for more than a fifth of El Salvador’s GDP, consumption is highly sensitive to US migration policy, Choussy said. At the same time, Bukele will likely need to lay off public-sector workers under an IMF program, so there’s a risk of Salvadorans expelled by Trump being dumped back home onto a weak jobs market, he added.  

Just how weak can be seen in the Tepecoyo district of the Balsamo mountains, about 20 miles west of the capital, San Salvador. Here, workers earning less than $200 a month live in shacks put together with planks and rusting metal sheets, and grind their own maize kernels to make tortillas which they cook on wood fires. One farmer says that his fruit trees were stripped bare by hungry local people, while malnourished children sometimes devour his raw cacao beans.

Minerals from El Salvador’s volcanoes are said to give its coffee a vibrant acidity prized by some connoisseurs. But this year, coffee cherries in the region suffered severe storm damage which meant that some of the crop was unfit for specialty grades and had to be sold at the lower, generic price.   

Maria del Carmen Sanchez earns about $170 a month picking coffee, and spends about half of this to send a package containing food, soap, toothpaste and toilet paper to a son who was rounded up in the early days of Bukele’s crackdown. 

Since part of the government’s anti-gang strategy is to cut off communication between prisoners and the outside world, Sanchez said she hasn’t spoken to her son since his arrest in 2022 and has no way of knowing whether he is receiving her packages.

“Sometimes I feel like dropping everything to go and look for that boy,” she said, adding that she can’t read so would be unlikely to get far.

El Salvador has the highest per capita incarceration rate in the world, more than triple that of the U.S., according to World Prison Brief, an online database. The homicide rate is on track to end this year at about 1.9 per 100,000, according to official figures, down from 53 per 100,000 in 2018. That means the world’s former murder capital is now less violent than Canada.

Coffee growers who live in the capital can now visit their farms without fear, and buy fertilizer without it being looted. But unpaved roads, illiteracy and low access to credit continue to trap much of the countryside in poverty.

While agriculture remains in the doldrums, and the nation’s biggest export sector, textiles and apparel, is being hit by fierce competition from Asia, some industries are flourishing. Tourism jumped 33% last year, to 3.4 million visitors, as fear of crime recedes.  

Money is also pouring into the nation’s housing market. This is being by driven largely by “faraway brothers,” the term Salvadorans use for their compatriots who migrated to the US decades ago. 

Industry leaders at the Salvadoran Chamber of Construction said the improvement in security has triggered the biggest boom they’ve seen since the civil war ended in 1992. 

“Three or four years ago, no one was thinking about moving back here,” said Luis Dada, chief executive officer of Inversiones Omni, one of the nation’s biggest construction companies. “Now, El Salvador has become an option.”

Salvadorans who have prospered in places such as southern California, Texas or the Washington area find they can get more for their money in their homeland. Even after the recent surge in prices, a 4-bedroom apartment of 1,800 square feet (168 square meters) and a terrace overlooking the Pacific Ocean can still be bought for $385,000. 

The buying frenzy has even spread to former no-go areas in the gang heartlands. Until recently, La Campanera was among the most violent neighborhoods on the planet. Now, this working class district on the outskirts of San Salvador is seeing soaring home prices.  

Everyone there has a horror story involving Barrio 18, the gang that controlled the area until 2022, when Bukele had them all detained, and flooded the neighborhood with troops and police. The area, which has a view of a volcano, is suddenly a desirable place to live. 

Maria de Los Angeles Morales was in a park with her children as dusk fell on a recent Saturday evening, an outing she says used to be impossible. She burst into tears as she recounted how gang members tried to rape her daughter, then shot her dead when she resisted. She described Bukele as an instrument of God. 

“If it hadn’t been for that man, imagine how many more people would be suffering,” she said. 

Another resident, Carlos Ponce, used to own an Internet cafe. In 2017, he says six gang members took him to a soccer pitch and gave him a severe beating when he refused to lend them his PlayStations. While he welcomes the gangs’ absence, he hasn’t seen any uptick in sales at his stall selling coffee, soda and snacks. 

“The economy isn’t helping,” Ponce said. “It hasn’t improved at all.”  

But there are signs of progress even if not everyone is feeling it. El Salvador’s dollar bonds have been among the world’s top performers since Trump’s November election win. The President-elect’s pick of a crypto proponent as US securities regulator sent Bitcoin to $100,000 for the first time, boosting the value of El Salvador’s holdings of the digital currency to more than $600 million, according to the government. 

The economy will expand 3% this year, according to a forecast from the IMF, after growing 3.5% in 2023. That’s above its long-term trend, though still weaker than regional peers.

Just as Bukele’s opponents concede that security has improved dramatically, some of his biggest admirers accept that there’s a long way to go to achieving a dynamic economy.

The district of La Campanera is now “as beautiful it could be, thanks firstly to God and secondly to Mr Bukele,” said Jose Majano, a retired security guard who said he earns about $60 per month from recycling bottles. The economy, though, “is difficult,” he said.

“It’s just me and my wife, two old people. Paying for food is tough for us,” said Majano, as he stood outside a barbershop by an alleyway that used to have a gang lookout at its entrance. “I ask Mr Bukele to remember us.” 

--With assistance from Philip Sanders and Robert Jameson.