Pressure mounts on El Salvador's Bukele

Following the decision by El Salvador’s newly elected national assembly to remove all five of the constitutional court’s justices as well as the attorney general, there is potential for further action this week.

Critics have called the move a potential coup, and the US has expressed its concern but President Nayib Bukele remains unrepentant. Three of the magistrates and attorney general Raúl Melara have tendered their resignations. Melara was replaced by Rodolfo Delgado.

“It’s a clear message that the president says, ‘I am the State and what I say will be done and we have the votes and we don’t need to talk or dialogue with anybody’,” Ricardo Castaneda, Instituto Centroamericano de Estudios Fiscales (ICEFI) senior economist for El Salvador and Honduras, told BNamericas.  

"I think that El Salvador becomes a very risky country for investors," he added.

Small scale protests in El Salvador were backed by condemnation from US vice president Kamala Harris, the European Union, Canada and others.

“We have deep concerns about El Salvador’s democracy, in light of the national assembly’s vote to remove constitutional court judges. An independent judiciary is critical to a healthy democracy – and to a strong economy,” said Harris in a tweet.

However, Bukele is standing firm. “To our friends from the international community: We want to work with you, trade, travel, get to know each other and help where we can. But with all due respect, we are cleaning out our house... and that's none of your business,” he said in a tweet.

Market reaction has been swift, with El Salvador bonds showing significant falls. The NOTASV2052 bond dropped by over 10% on Monday. However, with a legislative assembly session set for Wednesday, further volatility cannot be ruled out.

“Some [bonds] fell seven points which you have to go to the beginning of the pandemic to find such a drop. But I think there are still things missing, things that will happen that could possibly worsen the situation,” Castaneda said.

Potential changes that could worsen the situation include the removal of the electoral magistrates (TSE), the audit court, the human rights commissioner (PDH) or any government entity that requires a two-thirds majority vote for change. Estimates put Bukele’s Nuevas Ideas party and its allies at 57-64 votes in El Salvador’s national assembly. A two-thirds majority would require 56 votes.

Delgado has already said there will be reforms to the organic law of the attorney general’s office. This could lead to changes at the senior management level. 

With El Salvador in the middle of negotiating an IMF loan of US$1.3bn, experts believe that alternative sources of financing may be required. These could include China but that might further risk the US$4.4bn that the US had promised to invest in Central America to reduce migration.

According to Castaneda, El Salvador could follow Nicaragua as a clear example of what happens when a democratic crisis becomes an economic crisis. The economist points to three decades worth of growth at around 2% per year but an 8.7% fall in 2020 because of the COVID-19 pandemic. Such contractions were previously seen in El Salvador during the 1979-92 civil war.

Having arguably failed to act quickly enough in Honduras and Guatemala with Juan Orlando Hernández’s links to drug trials and the ongoing constitutional court election, respectively, pressure will mount on Washington to be seen to be doing something.

That could range from individual sanctions, the cancelling of visas or freezing of assets as occurred when the Magnitsky Act was recently invoked. Economic sanctions could impact remittances, which account for 24% of El Salvador’s GDP, according to the central bank.

Of the US$1.71bn in Q1 remittances, 95.4% came from the US and any threat to those funds would have severe consequences, according to Castaneda. The US is also the main destination for El Salvador exports, so commercial or trade sanctions could have a big impact.

An alternative source of pressure could be the IMF increasing demands for transparency and accountability in any loan agreement. Given the situation, the multilateral may have to be more cautious.

“It appears that President Bukele’s main idea is to increase his power no matter what,” said Castaneda to BNamericas. “It’s very important that they [investors] are on the lookout for the next actions because I think that will define the type of political project that this government has.”

Photo: El Salvador government