How El Salvador Became Latin America's Comeback Story

Summary We estimate the nation’s just-issued 30-year bond is still priced 200 basis points cheap compared to its fair value, with projected returns exceeding 33% over the next year should spreads narrow to our target. By 2024, 8% of Salvadorans have used Bitcoin to make payments. Expanding energy capacity is central to El Salvador’s economic strategy. We believe Bukele’s Bitcoin gambit can serve as a model of innovation, determination, and independence for the emerging world. El Salvador’s bold Bitcoin bet and sweeping reforms are turning it into Latin America’s ultimate comeback story. Special thanks to our EM Bond team for their perspective and contributions to this article. Introduction El Salvador has undergone a remarkable transformation under President Nayib Bukele, emerging as a beacon of innovation and resilience in Latin America. From adopting Bitcoin as legal tender to enacting sweeping fiscal and social reforms, the nation has defied global skepticism. VanEck recognized this potential early and made investments in Salvadoran sovereign debt. Despite the fierce rally in these assets, we estimate the nation’s just-issued 30-year bond is still priced 200 basis points cheap compared to its fair value, with projected returns exceeding 33% over the next year should spreads narrow to our target. During our visit to San Salvador last week to meet President Bukele and speak at the “Adopting Bitcoin” conference, we re-explored the ambitious vision driving El Salvador's future as the "Singapore of Latin America." El Salvador’s Past: Challenges and Stagnation For decades after its 1979-1992 civil war, El Salvador faced crippling challenges: Economic Struggles: National debt grew from 37.8% of GDP in 2001 to 95% by 2020, while economic growth averaged just 2% - the second-lowest in Central America. High Crime Rates: Persistent violence and gang activity made El Salvador one of the most dangerous countries in the world, stifling investment and social cohesion. Brain Drain and External Migration: Decades of instability prompted the migration of over 1.6 million Salvadorans abroad, primarily to the United States. This external migration hollowed out the local labor force and left the newly dollarized economy heavily reliant on remittances for hard currency, which at the peak accounted for 25% of GDP - approximately $8 billion annually. Bukele’s Reforms: A Turning Point Since his election in 2019, President Bukele has reshaped El Salvador with sweeping reforms, and the economy has seen significant gains. Crime Reduction: Homicide rates plummeted from 51 per 100,000 in 2018 to just 2.4 in 2023, transforming El Salvador into the safest country in Central and South America. During VanEck’s due diligence process, conversations with local taxi drivers revealed how Bukele’s crackdown on gangs has profoundly improved daily life for ordinary Salvadorans. Many drivers emphasized that they no longer must pay “protection money” to criminal groups, a burden previously consuming a significant portion of their income. More than one driver shared that his children can now play soccer outside in the evenings without fear - something unimaginable just a few years ago. These stories strengthened our conviction by highlighting how reduced crime is not just a statistic but a tangible, transformative GDP multiplier for families and communities across the country. Fiscal Discipline: Debt-to-GDP dropped to 59% in 2024, its lowest since 2008, thanks to $2.3 billion in sovereign bond refinancing and prudent budgetary measures. GDP Growth: Between 2021 and 2023, GDP grew 19%, a significant acceleration compared to pre-2019 averages. Tourism: The sector’s GDP share rose from 11.7% in 2019 to 12.3% in 2023. From January to July 2024, inbound visitors surged 22% year over year, creating 36,000 new jobs and reducing unemployment to 2.76%. Labor Force Participation: Participation reached 64.4%, the highest in El Salvador’s history. This set of catalysts has prompted Moody’s to upgrade El Salvador’s sovereign debt from Caa3 in May 2022 to Caa1 in May 2024 and S&P to raise its rating from CCC+ in June 2022 to B- in November 2023. S&P reaffirmed its B- rating with a "stable" outlook in April 2024. While these ratings are still considered “Junk,” their positive direction affirms El Salvador’s strategy for financial renewal. We expect the ratings agencies to follow bond prices higher and upgrade ES debt further soon. Cumulative GDP Growth in Select Latin American Countries 2021 - 2023 Source: World Bank as of 11/7/2024. Bitcoin: A Bold Experiment In June 2021, a supermajority of the Salvadoran Congress passed legislation making Bitcoin legal tender alongside the U.S. dollar. The government envisioned Bitcoin as a tool to encourage foreign investment, expand financial inclusion for the unbanked, and provide the nation with an uncorrelated reserve asset. The government offered $30 in Bitcoin to citizens who downloaded the Chivo Wallet to promote adoption. Research by Yale in February 2022 revealed that 68% of households were aware of the Chivo Wallet, and 78% of those had downloaded it. By 2024, 8% of Salvadorans have used Bitcoin to make payments. While some international observers initially viewed this as a modest figure, we believe it represents a meaningful step forward for a country with historically low rates of electronic payment adoption. The integration of Bitcoin into daily life is creating a foundation for broader acceptance and innovation in financial technology. El Salvador has also embraced Bitcoin as a reserve asset, holding 6,150 BTC, currently valued at ~$600 million with $150 million in unrealized gains. This sum currently represents 1.6% of the nation’s GDP of $36 billion, underscoring the government’s commitment to Bitcoin as a reserve asset. For comparison’s sake, if the U.S. were to authorize a Bitcoin reserve of 1 million BTC at an average price of $150,000, under legislation that Wyoming Senator Cynthia Lummis has introduced, the reserve would be worth $150 billion, representing only 0.57% of the U.S.’s GDP of $26.3 trillion. El Salvador's Bitcoin Worth >$600M Source: El Salvador Wallet Tracker, Artemis XYZ as of 11/21/24. El Salvador’s Bitcoin strategy extends beyond reserves. There are plans for $1 billion “Volcano Bonds”, half of whose proceeds would buy Bitcoin, aim to fund the development of Bitcoin City, a futuristic economic zone powered entirely by geothermal energy. This city is designed to attract international investment and innovation with zero taxes on income, property, or capital gains. Additionally, the government offers a “Freedom Visa” program, which grants citizenship to individuals who donate $1 million to the nation’s development efforts. While the Volcano Bonds have yet to be issued, the delay reflects a combination of strategic prudence - avoiding additional debt issuance in a high-interest rate environment - and geopolitical considerations as the government navigates sensitive negotiations with the IMF. By demonstrating fiscal restraint and prioritizing debt reduction, El Salvador strengthens its negotiating position while maintaining the option to issue the bonds under more favorable conditions in the future. The Vision for El Salvador During our meeting with President Bukele, he outlined bold but achievable goals to position El Salvador as a hub for nearshoring U.S. export capacity. Pro-growth policies, including economic "free zones," aim to attract multinationals in auto parts and tech manufacturing sectors by offering tax-free value-added operations. These initiatives are already luring investment, supported by a deregulated energy market and infrastructure improvements. Bukele also highlighted El Salvador’s substantial untapped gold reserves, which he described as the largest per capita and per square mile in the world. These deposits represent an enormous economic opportunity, but the previous leftist government banned mining activities in 2017. Bukele expressed his intent to reverse this law, citing the potential to extract the metal responsibly while adhering to modern environmental and sustainability standards. The president extended an invitation to VanEck’s gold geologists to research the deposits, signaling his administration’s willingness to collaborate with global experts to unlock this resource. If successful, gold mining could contribute to El Salvador’s economic transformation, adding another layer to the country’s diversification efforts. The author and President Bukele, as of 11/15/2024. Energy as a Catalyst for Growth Expanding energy capacity is central to El Salvador’s economic strategy. During our meeting with a senior government official in the president’s office tasked with coordinating between the state electricity company and private enterprises, key insights were shared about the nation’s energy landscape and its potential to attract high-tech industries: Current Energy Landscape: Peak baseload demand: 1.2 GW; installed capacity: 2.5 GW. Renewable energy (700 MW) includes geothermal, hydro, and one wind plant. Base power is primarily hydro and geothermal, with bunker and natural gas providing 380 MW. Planned Developments: By 2035, El Salvador aims to expand geothermal energy capacity with six or seven new 50 MW plants. A $1 billion government investment will fund energy projects over five years, with 15% of new generation reserved for government use. While $0.16/kWh for industrial power isn’t cheap, the senior official noted that this price is manageable for high-margin data center customers. This is particularly true given El Salvador’s unique direct undersea cable access with 30-millisecond latency hops to Miami. According to the official we met, this connectivity, combined with the government’s tax incentives, positions El Salvador as a competitive destination for data centers and AI-focused operations. El Salvador’s diversified energy strategy contrasts with neighboring Costa Rica, which faced energy shortages in 2023 due to its over-reliance on renewable energy sources like hydropower. Costa Rica's inability to meet demand during a dry season highlighted the risks of disconnecting fossil fuel-powered electricity generation – which they did for “green” purposes - without ensuring sufficient backup generation. In contrast, we think El Salvador’s mix of geothermal, hydro, and natural gas may provide a more resilient energy portfolio capable of supporting industrial and technological growth. Although no El Salvador data center customers had been announced at the time of publication, we heard confidence that agreements would be finalized soon, with companies drawn to the country's infrastructure, reliability, and policy advantages. Initiatives like the private Volcano Energy (23% owned by the El Salvador Government), which drives geothermal energy expansion for Bitcoin mining, further enhance El Salvador’s potential crossover appeal for Bitcoin miners and other industries with long-term needs for sustainable and secure power. Relations with the IMF and the U.S. El Salvador’s bold Bitcoin policy and fiscal reforms have complicated its relationships with international stakeholders, particularly the IMF and the U.S. During the Biden administration, diplomatic relations were strained. Sanctions were imposed on key Salvadoran officials, and human rights groups pressured the U.S. to take a tougher stance on the nation’s aggressive anti-crime policies. As El Salvador remains heavily reliant on remittances - $8 billion annually, or 24% of GDP - primarily from the U.S., maintaining a strong bilateral relationship is critical. The Biden administration’s approach has created significant headwinds, but a Trump presidency offers the potential for a reset. With Trump’s well-documented support for Bitcoin and focus on reshoring and “friend-shoring” supply chains, El Salvador could emerge as a strategic partner in U.S. efforts to build regional alliances. Trump advisors’ recent visit to El Salvador in June 2024, warmly received by the Bukele administration, has fueled speculation of closer cooperation in areas such as manufacturing, energy, migration, and Bitcoin mining. The IMF’s role remains central to El Salvador’s financial trajectory. Many believe the IMF is keen to secure a deal before the Trump administration takes office, fearing that a shift in U.S. policy could alter the negotiation dynamics. The release of El Salvador’s 2025 budget - a more austere spending plan designed to address the IMF’s preconditions - has been seen as a move to improve the likelihood of aid. However, Bukele’s subsequent major bond amortization isn’t due until 2027, which gives him considerable room to negotiate without immediate pressure. Why hurry to negotiate when the IMF’s position may change upon Trump’s inauguration? Investment Opportunity: A Contrarian Call VanEck’s early recognition of El Salvador’s potential has been validated with many of the bonds more than doubling from their 2022 lows. Bond Valuation: We still estimate El Salvador’s 30-year sovereign bond is priced 200 basis points cheap to fair value. Projected Returns: If reforms continue as expected and spreads narrow to our fair value target, we anticipate a total return exceeding 33% in the next year. Since BTC Purchase, Salvadoran Debt (+18%) Source: Bloomberg as of 11/8/2024 Conclusion El Salvador’s transformation is a testament to bold policymaking and resilience. From fiscal reforms to Bitcoin adoption and energy innovation, the nation has defied global skepticism and achieved measurable success - whether through USD bond performance, GDP growth, or Bitcoin valuation, boosting its reserves. To date, these achievements have resulted from El Salvador’s independent and often solitary efforts, pursued in the face of opposition from major international stakeholders, including the IMF and its largest shareholder, the U.S. Now, however, the landscape may be shifting. As the potential for closer cooperation with the U.S. grows and IMF engagement becomes more likely, El Salvador is poised to move from a solitary pursuit of its goals to a collaborative one. This emerging tailwind of international support could remove one of the country’s final hurdles, enabling it to achieve even greater economic integration and stability. For investors, this makes El Salvador’s sovereign debt a compelling opportunity. We believe Bukele’s Bitcoin gambit can serve as a model of innovation, determination, and independence for the emerging world. Disclosures Coin Definitions Bitcoin (BTC-USD) is a decentralized digital currency without a central bank or single administrator. 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