Private investment in El Salvador in 2021 was the highest in the last 61 years

Private investment in El Salvador in 2021 was the highest in the last 61 years, according to representatives of the Salvadoran Foundation for Economic and Social Development (Fusades).

Citing data from the Central Reserve Bank of El Salvador (BCR), the institution pointed out that private investment broke a record last year by exceeding US $5.2 billion. This amount represents an increase of US $1.4 billion compared to 2020.

The amount of foreign investment that reached El Salvador last year is equivalent to 18.4% of the nation’s Gross Domestic Product (GDP). GDP is the total production of goods and services of an economy. Private investment as a component of Salvadoran GDP in 2021 reached its highest percentage since 1961.

The resumption of projects positively impacts private investment

In a recently published institutional communique, Fusades representatives explained that the expansion of private investment in El Salvador in 2021 was driven by the execution of the projects paralyzed in 2020 due to the public lockdowns implemented to combat the coronavirus pandemic.

The economic expansion in 2021 was also due to a recovery of exports, imports, and remittances from overseas (mainly the US) that exceeded 25% of GDP. and the resumption of infrastructure construction permits that had been delayed for as many as five years.

For instance, In 2016, El Salvador faced a “long period” in which water permits were not granted for construction investments. This bureaucratic logjam resulted in 140 frozen projects valued at US $1.2 billion.

In 2017, there was an agreement to streamline permitting procedures, and government officials expected the projects to be completed in three years (by 2020). Still, some public works were delayed due to the global coronavirus outbreak and finally concluded in 2021.

What is expected for private investment in El Salvador in 2022?

This past March, the president of the Salvadoran Central Bank, Douglas Rodríguez, indicated that the investment projections for 2022 exceed US $2.2 billion. This estimate includes projects under construction, such as the liquefied natural gas (LNG) mega plant of Energía del Pacífico, the urban complex El Angel Valley, and Marsella City.

However, Fusades stressed that in 2022 the “environment has changed” in the world economy. The global economy dynamic now confronts geopolitical risks due to the Russian invasion of Ukraine, lower growth, the inflationary crisis that raises the price of food, and the hardening of the monetary policies of the United States.

These factors “will reduce business and household investment,” and the influence of the risk of emerging market debt drives away financing sources because capital flows “seek investment opportunities in developed countries with less” uncertainty.

After the momentum of private investment in El Salvador in 2021, and to keep up the pace of economic activity this year, Fusades has recommended the facilitation of procedures. However, in addition to this action, El Salvador must also focus on promoting flexibility in the labor market to capitalize on new opportunities in productive sectors and develop a successful investment attraction strategy.

The historical peaks of private investment in El Salvador

Fusades analysts also point out that there were periods when investment peaked in the last six decades. In general, however, the “effort has been historically low in the country to sustain the unsatisfied demand for employment.”

One of those peaks occurred in 1978 when private investment in El Salvador came to represent 15.6% of GDP. This figure was reached due to favorable international coffee prices and foreign investment announcements like the US electronics manufacturer Texas Instruments.

The second was in 1995 at 15.2% of GDP, after the Peace Agreements, which included economic reforms to promote exports and private investment. While the third was in 2008, which resulted from significant private investment in El Salvador in the telecommunications, hotel, textile, and aeronautics sectors.