The Washington Diplomat / June 2000
By Larry Luxner
SAN SALVADOR -- El Salvador recently surprised investors by showing the biggest improvement in creditworthiness of any of the 136 countries surveyed by Institutional Investor.
According to the prestigious magazine, El Salvador's credit rating rose 4.1 points in the six-month period ending September 1999, and 7.1 points in the one-year period ending September 1999 -- outperforming other strong contenders such as Slovenia, Estonia, Latvia, the Dominican Republic, Greece and Botswana.
It's ranked 13th in the world by the Wall Street Journal/Heritage Foundation's annual survey of economic freedom, and is tied with Chile for first place in Latin America.
Yet compared to Costa Rica, Honduras and other nearby countries, El Salvador "hasn't gotten the U.S. investment it deserves," says Anne Patterson, the U.S. ambassador here.
"El Salvador has the third best credit rating in the hemisphere. But still they've had difficulty attracting investment," she said. "It's an image issue. People still think this is a country of war, and it's not. Peace broke out a long time ago."
In January, El Salvador celebrated the eighth anniversary of the Chapultepec peace accord, which ended a civil war between government forces and Faribundo Marti National Liberation (FMLN) rebels that had taken the lives of 75,000 people and destroyed the country's economy.
Vice President Carlos Quintanilla Schmidt, who's been put in charge of attracting foreign investment by President Francisco Flores, says his country has undergone a complete transformation.
"In the last eight years, people from the FMLN became a political party by law, and now in our national assembly we have legislators from across the political spectrum," Quintanilla said in an exclusive interview. "When we talk about El Salvador, investors ask about social stability. That is now the most important question."
In fact, El Salvador is a violent society, and its six million inhabitants endure one of the highest homicide rates in Latin America.
"Crime is bad. People are clearly worried. This is a real problem for investors, and we're trying to help them in every way we can," says Patterson, adding that the ex-police chief of San Jose, Calif., has been appointed to head a U.S.-trained task force here.
At present, El Salvador has a per-capita income of $2,400, and has a Gross Domestic Product of around $12 billion. GDP grew around 2.2% in 1999, and is expected to grow even more this year. Yet the largest single source of foreign exchange -- well ahead of garment manufacturing and coffee exports -- is remittances from an estimated 1.3 million Salvadorans living legally and illegally in the United States.
In fact, a higher proportion of Salvadorans relative to the country's population live in the U.S. (mainly in Los Angeles, Washington, Houston, Miami and New York) than that of any country in the world. The $1.2 billion they wired home last year represents well over 10% of El Salvador's GDP. One factor that's not very important is monetary help from the Pentagon, which totaled over $4 billion in the 1980s -- making El Salvador one of the world's biggest recipients of U.S. aid. This year, says Patterson, El Salvador is getting only $34 million, "of which zero is military assistance."
On the plus side, notes the ambassador, is El Salvador's relatively clean record when it comes to corruption. In its latest ranking by Transparency International, it ranked much better than most other Latin American nations including Honduras and Paraguay.
"Corruption is less of an issue in El Salvador than in most other Latin countries," she said. "You don't bribe the police force here."
Quintanilla says his priorities are job creation; the fight against crime and poverty, and respect for the environment. He noted that a new agency has recently been created within the Ministry of Economy, to be headed by himself and two representatives from the private sector. Tourism will be one of the new agency's main areas of interest.
"In the end, what we're interested in is the creation of jobs," said the vice president. "We are convinced that if we increase the tourist sector, it'll create a lot of new jobs."
In 1999, about 665,000 tourists came to El Salvador, up from 541,000 in 1998 and 283,000 in 1996. Tourism generated $225 million in foreign-exchange revenues last year, double that of 1998.
"The presence of American hotel brands is very strong, and this is only in the last two years," says Thomas Pauly, general manager of the Camino Real Inter-Continental in San Salvador. "We were the first. Now, there's Marriott, Radisson and others. At least four big hotels here can compete with international standards. But the country has to improve its efforts in putting money into tourism. One of our main concerns is to get better PR for the country."
Pauly said there are now 1,100 first-class hotel rooms in El Salvador, with occupancy running at around 69%.
"Business was very good in 1999 because of all the privatizations," he said, adding that "Salvadorans living in the United States have a higher disposable income now [because of the strong U.S. economy], and they're coming back and staying in our hotel."
Quintanilla said privatization is good for all Salvadorans, and says that both he and Flores, the country's 40-year-old president, have made it a priority of their administration.
"We are the third government of the same political party. This has given us an opportunity to continue the privatization policies begun by President [Alfredo] Cristiani," he said. "We believe the government has to be a facilitator of the private sector. We don't have to own factories or utilities."
Under President Armando Calderon Sol, the government sold off Antel, the state-owned phone company, as well as five pension funds.
"During our administration, we want to continue the process," said Quintanilla. "We'd like to privatize not only the distribution of power, but also the generation of power, and we're inviting anyone from the private sector who'd be willing to invest in the administration of ports and airports."
Quintanilla says he hopes to duplicate with other state-owned enterprises the success El Salvador had in selling off Antel.
In 1995, before Antel's privatization, the overburdened telco had 175,000 fixed and 50,000 mobile lines. Today, there are 500,000 fixed and over 400,000 mobile lines. By the end of this year, says privatization czar Juan Jose Daboub, El Salvador will boast more than a million lines in service -- translating into a teledensity of over 15 per 100.
Says Daboub: "The idea is to minimize regulation and maximize competition. We eliminated the word exclusivity from the dictionary. I would not have been involved in the process if we had done it any other way."