El Salvador’s Scramble for a Bailout

Welcome back to Foreign Policy’s Latin America Brief.

The highlights this week: The U.S. sanctions-based policy toward El Salvador may contribute to a messy debt crisis, Panama sees rare protests, and a satirical Peruvian song becomes an unexpected global hit.

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Halfway around the world from Latin America, Sri Lanka’s catastrophic debt crisis—and ensuant political turmoil—has prompted economic analysts to draw up lists of countries that could be next. With rising interest rates in the United States, debt hangovers from pandemic social spending, and surging energy prices, there is a serious possibility that other countries could soon be in similar trouble.

In Latin America, no country is more vulnerable to defaulting on its debt than El Salvador, according to a projection released this month by Bloomberg Economics. The International Monetary Fund (IMF) has vocally criticized the financial management of the government of President Nayib Bukele, who since coming into office in 2019 has allowed public debt levels to mount and gambled on accepting bitcoin as legal tender. The IMF says the latter poses risks to financial stability, financial integrity, and consumer protection.

Bukele’s government is due to submit an $800 million bond payment to lenders in January 2023. Currently, it lacks the funds to make the payment. To make up for this and other cash shortfalls, San Salvador since last year has been in slow-moving talks with the IMF to try to obtain a $1.3 billion loan.

But for El Salvador, getting a check from the fund is politically fraught. That’s because the IMF’s largest shareholder, the United States, is carrying out a high-profile sanctions campaign against what it calls “corrupt and undemocratic actors” in El Salvador. They include a handful of  Bukele’s advisors, cabinet officials, and congressional allies, according to the U.S. Treasury Department and State Department. The most recent update to the State Department sanctions list was published Wednesday.

The U.S. sanctions policy wagers that cutting these actors off from travel and business links to the United States will dissuade them from engaging in corrupt activities at home; the Biden administration views corruption as a key cause of U.S.-bound migration from Central America.

Since U.S. President Joe Biden took office, Washington has openly accused Salvadoran officials of involvement in multimillion-dollar corruption schemes, inappropriately removing Supreme Court justices from their posts, and misusing public funds for personal benefit. The accused officials have generally pushed back, and Bukele has repeatedly mocked U.S. attempts to criticize him. (He responded to a leaked version of Wednesday’s sanctions list in El Faro last week with a tweet alluding to the history of U.S. interference in Central America.)

The tensions between El Salvador and the IMF emphasize the contradictions of Washington’s strategy toward the country. On the one hand, the IMF denying the Bukele government a highly sought-after loan could be seen as a straightforward consequence of not implementing reforms in response to Washington’s sanctions campaign. On the other, doing so could send El Salvador spiraling into an economic crisis that causes outward migration to skyrocket.

In a clue that Washington might want to preserve the option of an IMF deal, Salvadoran Finance Minister Alejandro Zelaya—who is responsible for negotiations with the IMF—appears to have been removed from the State Department sanctions list published Wednesday after being included in the El Faro leak.

If the IMF goes through with the loan to El Salvador, one key aspect to watch is whether the deal includes “good governance” requirements on political matters the United States has tried and failed to influence so far. Over vocal U.S. objections, Bukele has dismissed judges en masse, sought to curtail citizens’ ability to solicit public information from the government, and canceled an anti-corruption task force that was supported by the Organization of American States. Washington has also slammed Bukele’s campaign of mass arrests, which has seen more than 43,000 people detained since March on accusations of gang connections. Security policy, however, is not usually featured in IMF agreements.

If no deal is reached with the IMF, Bukele is weighing nationalizing some pension funds, issuing new taxes, and cobbling together other financing from sources such as the World Bank and Central American Bank for Economic Integration, El Faro reported. Even with a possible IMF deal, the country will still need to draw on several other sources of funding to balance its budget and repay creditors, Zelaya said last week.

Regarding the effectiveness of Washington’s naming-and-shaming anti-corruption strategy, Brian Winter of Americas Quarterly foresaw the current state of play last year, writing that “Central American governments now seem more comfortable ignoring, or openly defying, Washington than any time I can remember.”

While neighboring Central American countries could theoretically try to affect Bukele’s governance and security policies, most have so far refrained from pressuring him. Although Costa Rica, the Dominican Republic, and Panama announced they were launching a so-called Alliance for Development in Democracy last year, they have yet to speak up on Bukele’s mass arrest campaign, El Faro’s José Luis Sanz told Foreign Policy. And the fledgling Honduran government under President Xiomara Castro “still has to really show what its long-term commitment is to the fight against corruption and for human rights,” Sanz added.

Rather than criticizing Bukele’s mass detentions, security officials in both Honduras and Guatemala have shown interest in potentially replicating them, the International Crisis Group’s Tiziano Breda told Foreign Policy. As long as the Salvadoran president’s popularity remains high—a towering over 80 percent in May, according to one poll—there are few incentives for him to change course, Breda added.

In a recent El Faro piece with Roman Gressier, Sanz mused about the many Salvadoran—along with Guatemalan, Nicaraguan, and Honduran—officials who appeared on the latest U.S. sanctions list, as well as Washington’s frosty relationships with the countries in question.

“Can sanctions carry the weight of U.S. regional policy?” they asked. In another recent story, Sanz noted, “Nicaragua and its apparent immobility despite being internationally sanctioned for five years feeds skepticism about the real impact” of the latest U.S. sanctions list.

Monday, July 25: Turkish President Recep Tayyip Erdogan will reportedly begin a trip to Mexico, Venezuela, and Argentina.

Sunday, Aug. 7: Colombian President-elect Gustavo Petro takes office.

Offshore winds begin to blow. Offshore wind farms—where turbines either float on water or are installed under the ocean—are one of the world’s youngest forms of clean energy; almost half of all global offshore wind capacity was installed in 2021 alone, according to the Global Wind Energy Council. Though no such farms are currently in operation in Latin America, Brazil and Colombia have paved the way for their permitting in recent months through a Brazilian presidential decree and a Colombian government road map for the industry. The regulatory moves come alongside the announcements of the first offshore wind projects in those countries.

Colombia’s outgoing energy minister, Diego Mesa Puyo, told Diálogo Chino that some $1 billion in investments is expected in offshore wind projects in Colombia alone in the next three to four years. In Brazil, developers have requested permits to construct offshore wind sites off the coasts of at least five different states, BNAmericas reports. Altogether, Colombia is home to 109 gigawatts of potential offshore wind capacity, while Brazil is home to 1,228 gigawatts, according to the World Bank Group.

Emberá Indigenous women block the Pan-American Highway during a protest against fuel prices in Chepo, Panama, on July 20.LUIS ACOSTA/AFP via Getty Images

Protests in Panama. Social unrest related to inflation, which recently shook Guillermo Lasso’s government in Ecuador, has now arrived in Panama. Mass demonstrations are rare in the country, which pegs its currency to the U.S. dollar and is thus more insulated than other regional economies from price fluctuations. Still, analysts are calling the protests of the past week Panama’s largest social unrest in 30 years.

The price of fuel in Panama has risen almost 50 percent since January, AFP reported. In recent days, ire at the government escalated after photos of lawmakers enjoying expensive whisky circulated on social media. While an initial deal between the government and protesters was reached last week to cap fuel prices and stop the demonstrations, protest leaders later returned to the streets, claiming the deal was reached under pressure.

Peru’s unlikely meme. A song that Peruvian artist Tito Silva wrote to mock flirtatious text messages that were allegedly sent by former Peruvian President Martín Vizcarra to a woman other than his wife has unexpectedly become one of Spotify’s top hits in recent months. The song, titled “Mi Bebito Fiu Fiu,” has since been sung by reggaetón star Bad Bunny and played by the soccer club Real Madrid’s TikTok account, Dan Collyns reported in the Guardian.

While “Mi Bebito Fiu Fiu” is his biggest hit yet, it’s not the first time Silva set political moments to music, Vita Dadoo wrote for NPR: He previously “garnered national attention” for remixes of speeches and statements from Vizcarra and from current Peruvian President Pedro Castillo.

The song’s success has sparked controversy. Vizcarra denied having an affair, and Spotify withdrew the song from its platform over reported concerns of a copyright violation (it was written to the tune of a 2000 hit by Eminem and Dido)—but not before it reached a ranking in the Spotify Viral 50, however. The allegations have also “damaged Vizcarra’s public image as a family man,” Collyns wrote.

Bibiana Angel, 39, owner of the hostel Eco Pousada Estrelas da Babilônia, poses on its roof, covered by solar panels and overlooking Copacabana Beach, at the Babilônia favela in southern Rio de Janeiro on April 8.MAURO PIMENTEL/AFP via Getty Images

After 2021 broke records for the most-ever venture capital (VC) funding flowing to start-ups in Latin America, investors have been more conservative this year amid concerns about slowing global growth and rising interest rates. In the second quarter of 2022, preliminary data from the Association for Private Capital Investment in Latin America shows, $2.4 billion went to start-ups in the region, down from $2.8 billion in the first quarter. Still, 2022 is still on track to be Latin America’s second-best year in history for VC funding.

The economic uncertainty has led to layoffs even at some of the region’s highest-valued start-ups. The Brazilian Startup Association told the news agency EFE that in recent months, Brazilian unicorns—companies worth over $1 billion—have seen more than 1,000 workers laid off or quit. Layoffs have occurred at the Brazilian real estate start-ups QuintoAndar and Loft and the Mexican used car dealer Kavak, among other companies. Many laid-off employees have created their own online databases to advertise their skills.

Even so, the more sober business environment has not stopped several companies from raising more than $100 million in the second quarter. Funders have bet on companies including Xepelin, a Chilean payments and financial information platform for businesses; the Mexican grocery delivery company Jüsto; and Brazil’s Solfácil, which provides financing for people installing solar energy systems in their homes and businesses.

“The investment glut of the past couple of years spoiled companies who now look back wistfully at what many considered to be an age of ‘free money,’” Rest of World’s Alex González Ormerod wrote. But funding is still flowing for those companies that can demonstrate their profitability and not only growth potential, he added.