El Salvador’s President Nayib Bukele sabotages his own Singapore dreams

By Juan Pablo Spinetto

Having crushed the political opposition and his country’s omnipresent crime gangs in less than five years, El Salvador’s disruptive President Nayib Bukele faces an even more demanding challenge: achieving prosperity for his people.

Some commentators have argued that Bukele’s endgame should be turning El Salvador into a Latin American version of Singapore, a paradise of order and free markets where a single party dominates politics in the name of efficiency — a model that the leader is not shy to tout himself. Just as Singapore became one of the world’s richest nations under Lee Kuan Yew, another disruptive leader, the argument goes, the 42-year-old millennial president can achieve progress through his total-security, technology-embracing, probusiness strategy.

Lea la nota en español.

The idea sounds ambitious yet not totally unrealistic. Becoming a beacon of relative peace in Central America will surely help the country attract new investments and tourists, boosting activity and wellbeing. The problem is that Bukele seems to be undermining that goal by ignoring the need to fix El Salvador’s unsustainable fiscal deficit and by appearing at times unreliable to the business community. If you are trying to become a magnet for foreign investment, that’s self-defeating.

Bukele was just 37 when he became El Salvador’s president in 2019, one year older than when Lee took over as the first prime minister of Singapore exactly six decades before. Both share a tough-on-crime, tough-on-corruption approach, with the Salvadoran’s ruthless tactics turning his country from one of the world’s most violent into Latin America’s safest, at least in terms of homicides per capita.

It’s hardly a secret that Bukele is also not very fond of liberal democracies, having ignored constitutional limits to run for office again in February, when he won a resounding victory with almost 85% of the votes. At the same time, El Salvador’s decision earlier this month to eliminate income tax on overseas investments and remittances (backed 69-to-zero in congress) resonates with the model of attracting wealthy investors with generous financial arrangements, just as Singapore did.

In essence, the social contract sketched here would mean Salvadorans will trade political freedoms for the promise of economic progress and social peace. For a region wracked by crime, the positive growth impact from clamping a lid on violence shouldn’t be underestimated. You would be right to question his human rights track record, but in a society that suffered so many painful years, the contrast is massive and welcome — so much so that voters ended up ignoring their own constitution.

Unfortunately for Bukele, there are also big differences with Singapore, which ranks as the world’s best place to do business. For a start, El Salvador, a country of more than six million people that is slightly smaller than Israel, is not a geographically strategic island but part of a chaotic neighborhood: Central America is plagued with problems from migration and drug trafficking to low productivity and scarce economic dynamism (granted, Lee also faced a tough political situation when he took over Singapore, before the country’s split from Malaysia).

Even as Bukele may be a hero in some conservative or libertarian circles in the US, he has yet to build an honest, strategic partnership with successive American governments as Lee did over the decades. Even more significantly, the country hasn’t yet presented a plan to tackle its unsustainable fiscal imbalances, which Barclays Plc estimates at 4.6% of gross domestic product in 2023 once the pension deficit is included.

That’s a key weakness in Bukele’s full-control strategy.

“El Salvador is clearly a lot safer, there is more tourism and more micro foreign direct investment but not yet at the institutional level that's needed,” Barclays Credit Strategist Jason Keene told me. “It’s sort of all smoke and mirrors. Bukele can do the things needed to fix the fiscal position, but we haven't seen clear evidence that he is doing so.”

As he prepares to start a new term, the government seems more focused on trying to gain time. Bukele may be hoping that a like-minded Trump administration in the US next year could get him better terms in a deal with the International Monetary Fund. Investors were pleasantly surprised when the country made a bond payment in early 2023, avoiding default and kicking off a massive rally in the country’s securities. But now they are more circumspect.

Yield on El Salvador's international bond maturing in 2027.

Moreover, the possibility of a fresh IMF deal may be receding, not least because of a lack of transparency in the government’s accounting. The introduction of Bitcoin as legal tender in late 2021 didn’t help: If Bukele wasn’t ready to give up on Bitcoin when it plunged to almost $15,000 in late 2022, he won’t do so now that the crypto currency trades around $65,000; in fact, he’s doing victory laps.

Rejecting an IMF program is of course a valid policy option — but it won’t solve the underlying problem of having to cover $2.6 billion in financing that Barclays estimates is needed between 2024 and 2027 (a significant figure for a $35 billion dollarized economy).

It’s puzzling that a leader who enjoys such popular backing is unable to chart a path to fiscal sustainability. According to an IMF report last year, the austerity effort needed to improve confidence equals around 3.5% of GDP over the following three years, tough but not impossible. True, Bukele may prefer to speculate that if the economy grows faster than expected, the adjustment will be smaller. But in any case, solid economic growth won’t happen until El Salvador removes the default fears ahead.

Ultimately, to see a Salvadoran miracle the country needs to post growth rates of 5 per cent-6 per cent for years to come — not the meager 1.9% expected for 2024. That requires consistency, planning and heavy government investment in education and innovation. El Salvador hasn’t shown much of that yet.

El Salvador's risk has fallen.

Bukele instead seems more interested in lecturing the world on the end of globalism and the “dark forces” that are coming for the US. His iconoclastic, provocateur style has surely raised his global profile — but that’s not the same as creating the trust needed to convince corporations to spend big bucks in his nation.

That’s a shame, because according to the International Finance Corporation, El Salvador could could generate additional cumulative exports to the US between $6.9 billion to $13.8 billion in the next decade thanks to the nearshoring trend..

As some other governments in the region — both democratic and authoritarian — have learned the hard way, permanent fiscal slippages are the surest way to lose political control. What’s more, the sad experience of Latin American dictatorships such as Venezuela, Nicaragua and Cuba doesn’t back up the idea that authoritarian governments can manage their economies better — quite the opposite.

Bukele needs to put his budget numbers in order and offer a predictable business path ahead for companies and families to invest if he really wants to realize his Singaporean utopia. Otherwise, he risks ending like many other authoritarian leaders in the region: powerful, maybe even still admired, but without having significantly improved the economic prospects of his people.