El Salvador takes risks for Chinese investments – DW – 19.11.2022

“Uncertain” is perhaps the word that best describes the current situation in El Salvador.

This week, FTX, one of the world’s largest cryptocurrency exchange platforms, announced that it has filed for bankruptcy. The news caused bitcoin price to drop sharply over the past few days — and drew all eyes to El Salvador. The Central American nation’s president, Nayib Bukele, made Bitcoin legal tender in 2021 and also invested much of the country’s tax reserves in the digital currency.

Bukele’s decision to invest El Salvador’s reserves in bitcoin was not universally applaudedPicture: Camilo Freedman/SOPA Pictures via ZUMA Press/Picture Alliance

“Unfortunately, when you ask for information about the scale of investments in Bitcoin, the answer is either that that information doesn’t exist or that it’s confidential,” said Ricardo Castaneda, country coordinator for El Salvador at the Central American Institute for Fiscal Studies. Castaneda said it is only possible to calculate El Salvador’s investments in Bitcoin based on the president’s tweets. According to the President, the investments could amount to around 120 million dollars (116 million euros).

After the global devaluation of cryptocurrencies and little confidence in the international markets, El Salvador is facing new economic difficulties.

“When the international markets see how big the budget deficit is, how the expenses cannot be paid and how the debt is piling up, they will be more cautious and classify you as high risk,” says Roberto Rubio Fabian, executive director of the National The Foundation’s representative for Development and Transparency International in El Salvador told DW.

In January, El Salvador will have to pay 667 million euros ($691 million) in international debt to redeem a Eurobond. “China has offered to buy all of our debt, but we have to tread carefully,” Vice President Felix Ulloa said at a recent event in Madrid.

New economic alliance

This has never been confirmed by Xi Jinping’s regime in Beijing. Three days later, however, the governments’ common interest in starting negotiations for a free trade agreement was confirmed at an event in San Salvador that brought together Bukele and Chinese Ambassador Ou Jianhong.

As early as 2018, after ending ties with Taiwan, El Salvador showed signs of rapprochement with the world’s second largest economy. This brought some advantages.

Bukele, wearing a sash in the colors of the Salvadoran flag, gestures toward Parliament
Nayib Bukele has been President of El Salvador since June 2019Image: Jose Cabezas/REUTERS

“China has made three donations to El Salvador: the construction of some kind of beach amusement park, a stadium yet to be built, and a library. These investments improve China’s image and, of course, our country’s image as well,” explained Rubio Fabian.

Desiree Reder, a researcher at the German Institute for Global and Regional Studies in Hamburg, added that the current state of democracy in El Salvador also prevents it from developing closer ties with government-critical countries like the US.

“In this regard, China does not impose sanctions based on human rights, and that makes it a possible solution. The big question is whether the benefits of the relationship outweigh the costs,” she told DW.

‘Nothing is free’

While an eventual alliance with China could serve as a “lifeline” for the Salvadoran economy, experts agree that such a deal could also pose several risks. “Nothing comes for free,” said Reder.

“El Salvador could see some benefits for its infrastructure, something we are already seeing, but China will demand something in return. This could be exclusive rights to commercial gains, or it could require specific projects in areas that may be protected or could impact some communities,” she added.

Castaneda of the Central American Institute for Fiscal Studies also doubts whether the idea of ​​a free trade agreement with China is good business for El Salvador. On the contrary: He believes that the Central American country would suffer losses.

Additionally, Castaneda believes it all boils down to politics. “Remember that President Bukele is seeking re-election and has virtually no allies internationally, plus there are many tensions with the US. Bukele is looking for support for his decisions, and China doesn’t exactly excel when it comes to defending democracy,” he added.

Experts also doubt how great the real interest in El Salvador is, given that its strategic position cannot be compared to countries like Brazil or Panama. However, they also point out that China has gradually strengthened its ties with Latin America, breaking the region’s decades-long dependence on the US. Indeed, this may be one of the main motivations of Xi Jinping’s regime.

“China keeps and strengthens its presence and gradually improves its image,” said Rubio Fabian.

This article was originally written in Spanish.

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