The Central American country’s government has created a new agency to attract foreign direct investment to El Salvador.
Considered one of the most challenging countries in Central America for foreign direct investment (FDI), the Nayib Bukele Government of El Salvador has begun to act to try to change this state of affairs. At the beginning of June 2023, the Salvadoran Congress approved the Law for the Creation of the Investment and Export Promotion Agency. This organization (INVEST) is intended to attract more foreign direct investment to El Salvador. It will seek to gain Spanish investment that is far from reaching its potential volume today. This is even though Spain is the third investor in the Central American nation.
Spain’s foreign direct investment in El Salvador leads Europe
Spanish investment in El Salvador, which had been increasing modestly, has slowed its pace in recent years. According to the ‘XV Report on Spanish Investment in Ibero-America’ by IE University, the country will be one of the markets where FDI will not grow significantly in 2023. All in all, Spain is El Salvador’s leading political and economic partner in Europe. The countries have a bilateral treaty for the Promotion and Reciprocal Protection of Investments and an agreement to avoid double taxation. Spanish firms have asked San Salvador for regulatory improvements to further facilitate their foreign direct investment in El Salvador.
In El Salvador, where Spanish investment has traditionally been modest and variable, even though Spanish firms rank third in capital flow to the country (10% of FDI, 900 million stock), companies are present in the modernization of transport and energy infrastructures and play a key role in agribusiness and tourism. Present with investment in El Salvador are Spanish firms such as Barceló, Calvo, Acciona, Abantia, ACS, FCC, Indra, Atento, Santander, Mapfre, Inditex, Mango, and Iberia. Telefónica, within its divestment strategy, closed the sale of its subsidiary there in 2022 for 125 million euros to the General International Telecom investment fund.
More promotion of foreign direct investment to El Salvador
The new Invest Agency will replace the existing Export and Investment Promotion Agency of El Salvador (Proesa), which will be dissolved. Once the law goes into effect, Invest will promote foreign direct investment in El Salvador to investors and increase exports. However, the power to set up committees for each Public-Private Partnership project is separate from the law, and the Ministry of Economy will assume this responsibility.
A study prepared by the KPMG firm recently indicated that El Salvador is among the most challenging countries for investment in Latin America. It ranks as the fifth most attractive country to invest in, surpassed by Costa Rica, Honduras. the Dominican Republic and Panama. According to the survey, the country ranks 13th in attractiveness for doing business. It only exceeds Guatemala, Nicaragua, Bolivia, and Venezuela. However, San Salvador has been indicating in the last year that the country has improved in terms of investment, which they attribute to different reasons, such as the significant improvement in security and the adoption of Bitcoin.
According to the survey carried out among 400 business leaders in the region, El Salvador still needs to register among the ten most attractive countries to invest in Latam in a context where opportunities for mergers and acquisitions are increasing. The first place on the list is occupied by Mexico since 79% of companies and investors consider that country the most attractive to do business. After Mexico, Brazil (69%); Costa Rica (54%); Chile, Colombia, and Peru are recognized as the best investment venues. The list analyzes 17 of the 19 Latin American countries.
The lack of abundant foreign direct investment in El Salvador (the country continues to be the country that attracts the least foreign capital flow in Central America) could be due, according to the study, to the fact that it does not yet offer what companies are looking for: clarity in the opportunity to invest, diversify and grow. In the KPMG report ‘In an uncertain world, mergers and acquisitions in Latam are increasing,’ it is emphasized that investors now perceive less legal certainty in the country.
International campaign for foreign direct investment in El Salvador
The Central Bank itself of El Salvador points out that in 2022 the flow of investments in the country, that is, the inflows and outflows in monetary terms, was US -99.1 million dollars, a negative figure that reflects that more investments left El Salvador than those that entered, despite the official speech of the Government of Nayib Bukele, which highlights that the exception regime in public security and the adoption of bitcoin have been vital in attracting investment.
Despite the government’s efforts, more foreign direct investment in El Salvador is needed. As a part of this effort, in recent times, San Salvador has made an effort to define the country as a safe place for investment, notably in tourism. It did so in Madrid in January 2023 through the Minister of Tourism, Morena Valdez. Likewise, in March, the Government of El Salvador reinforced its campaign to attract foreign capital with a campaign focused on the fact that the country has a “propitious” climate for doing business and hopes to become a place where investors pay attention and multinationals are established.
Both the Minister of Economy, María Luisa Hayem, and other ministers highlight the opportunities offered by El Salvador in sectors such as logistics, construction, aeronautics, water, technology, tourism, agribusiness, health, railway, airport, and transport infrastructures, ‘outsourcing ‘ and specialized textiles, thanks to “legal security, macroeconomic stability, the promotion of innovation, the development of public infrastructure and a legal framework defined in the Investment Law that is governed by the principle of non-discrimination and equal treatment of national and foreign investments.
The Salvadoran economy, highly dependent on remittances, grew at a rate of 2.6% in 2022 and is expected to slow to 2% in 2023. This is the case even though the IMF is optimistic and has praised that the country has experienced “solid” growth in the last year, with a reduction in inflation, despite the “adverse” impacts; and highlighted the security improvement, which is giving a “greater than expected” boost to private investment and growth.
