January 27, 2023: Global News Roundup
El Salvador beats the odds—crypto gamble opens doors for Southern debtors, surprises investors, disappoints the IMF
The Global News Roundup collects news stories from entirely international (non-US) media sources on variety of pressing global issues and events.
Good morning! As you know, one of my major goals with these Roundups is to call attention to what’s happening internationally, focusing on global events and stories that don’t get much press in the US. This was one of those weeks when headlines all over the place were pretty similar, focusing mostly on the Ukraine war, and to a lesser extent, growing US-China tensions around Taiwan. In case you missed these stories, I included some links to international coverage below.
Rather than rehash what you’ve probably already read about elsewhere, I thought I would discuss what happened in El Salvador this week instead. It’s a really interesting and hopeful story that I’ve been researching for an article I’m writing about the ongoing global debt crisis and how it’s impacting the global South (the “global South” is, very roughly, what used to be called the “Third World” or the “developing world”). The article is slated for publication sometime in February in Dollars & Sense magazine and I’ll be sure to post about it here, too, in case you’re interested in reading more.
This week, the government of El Salvador did something amazing: It made a US$800 million payment on an outstanding external bond obligation, defying expectations that the government would default. El Salvador is an underdog in the global debt arena, and really no one, especially not international investors and the IMF, expected them to make this payment on time. But they did it anyway. How did this happen and why am I bothering to tell you about it? Let me explain.
El Salvador is the smallest country in Central America by land area, with a population of about 6.5 million people (a bit larger than the population of the state of Maryland), real GDP/capita (in PPP terms) of just over US$9,000 and a poverty rate of about 22%. Nominal GDP in 2021 was about $29 billion, with El Salvador ranking as the 102nd largest economy, sandwiched between Macao and Honduras. Relevant to the debt story, El Salvador has a long history of sovereign debt distress, has used the US dollar as legal tender in lieu of a domestic currency since 2001 (such an economy is said to be “dollarized”), includes among its top exports garments/textiles and plastics and mineral fuels (including oil), relies on remittances for almost 20% of GDP, occupies a strategic location on the Pacific Ocean, and in 2019 elected 37-year old Nayib Bukele to the presidency, the youngest president in the country’s history (pictured below). (Remittances are monies sent back home by people working abroad and are a major source of external finance for a whole host of developing economies.)
(Image: Salvadoran President Nayib Bukele at a press conference in 2020, courtesy of Reuters here).
Bukele is a controversial figure. Outspoken, Twitter-obsessed, and something of a firebrand, in 2019 he beat both of his competitors, from the country’s right- and left-leaning parties, breaking El Salvador's 30-year “political duopoly” (he used to be a member of the left-wing FMLN, but was expelled in 2017). Over his first two years in office, he boasted a higher approval rating than any other president in the country’s history, although his international critics often refer to him as a dictator (see, e.g., here and here). Among the major successes advocates tout is his law and order campaign against gang violence and homicide, which has garnered substantial international criticism and reminds me a bit of the aggressive crackdowns former Filipino president Duterte undertook in recent years. The new political party Bukele formed in the lead up to his election—the populist New Ideas Party—also focuses on mitigating inequality and poverty. The Economist quoted one Salvadoran woman on her support for Bukele, who said, “Nayib Bukele has done things no president has ever done before…We have received packages of food, including tuna and rice, and he is going to send computers to my children." This aspect of Bukele’s agenda reminds me a bit of the social welfare programs enacted by Brazilian president Lula da Silva during his first stint in office in the 2000s.
Whatever else you might think of him, Bukele has certainly made good on his promise of “new ideas”. In June 2021, El Salvador’s legislature voted to make bitcoin legal tender, and 90 days later, in September, the change formally went into effect. According to the BBC, President Bukele said at the time the bill was passed that, “It will bring financial inclusion, investment, tourism, innovation and economic development for our country”, and also open up financial possibilities for the 70% of the population that doesn’t have a bank account. Similar to other major Western outlets, the BBC cited experts concerned that the bold move on crypto could “complicate matters with the International Monetary Fund (IMF), where El Salvador is seeking a more than $1 billion programme”.
The IMF was not even remotely supportive of the policy change and went on to condition future loans to El Salvador’s government on the suspension of bitcoin as legal tender. In January 2022, the IMF “warned President Nayib Bukele of the risks the cryptocurrency poses to the country, stressing that it would be difficult to get a loan from the institution”. It’s important to understand that the IMF, alongside the World Bank—both of which are broadly disliked across the developing world because they are understood to operate largely in the interests of their most generous patrons, i.e., the US and other Western governments—have for decades consistently placed these kinds of onerous policy conditions on loans to Southern economies in distress, coercing the their adoption using desperately-needed funding as leverage. In the wake of the 1980s debt crisis, in order to ensure that international creditors would be repaid in the future, the Bank and the Fund began requiring governments to liberalize trade and finance, float exchange rates, and reduce fiscal spending, among other measures intended to “free” up monies to service external debts. In 1992, Susan George, my hands-down favorite writer on matters of Southern debt, wrote as follows about IMF and World Bank loan conditionality: “If the goals of official debt managers were to squeeze the debtors dry, to transfer enormous resources from South to North and to wage undeclared war on the poor continents and their people, then their policies have been an unqualified success.”
In the past, Southern governments trying to manage domestic financial instability and crisis had little choice but to dutifully obey their creditors’ demands. Making matters worse is the fact that private investors (for example, foreign holders of emerging market bonds) look to the evaluations and assessments of the Bank and Fund in order to guide their own investment decisions. So, if the Fund is nervous about a country’s economic prospects, investors often follow suit. And this is exactly what played out for El Salvador. Following IMF predictions of financial instability surrounding the move to legalize crypto, international investors got anxious and worried. After the June 2021 bitcoin bill was passed, an IMF spokesperson noted publicly that, “Adoption of bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis.” This announcement spooked investors who were “concerned about the future of an IMF deal they see as key” and began demanding “increasingly higher premiums to hold Salvadoran debt”. So, to sum up, El Salvador made a bold policy move, the IMF didn’t like it and subsequently threatened to withhold loan funds until the policy was reversed. Investors heeded the IMF’s warnings and, in turn, threatened to take their funds elsewhere unless El Salvador paid them more.
But—and this is the amazing part—El Salvador did not fold. Then, following a volatile summer in crypto markets, in September 2022, a major global credit rating agency, Fitch, downgraded Salvadoran debt to ‘CC’, a ratings level denoting “junk bond” status. And, still, El Salvador did not fold. Rather, the government stood by its policy and bought up as much crypto as it could as prices fell (bitcoin prices have recovered nicely since the FTX collapse, up 40% so far in January alone). And, so, we come back around to this week’s news, in which El Salvador repaid US$800 billion in outstanding bond obligations right on time. President Bukele gloated on Twitter on Tuesday: “Well, we just paid in full, $800 million plus interest. But of course, almost nobody is covering the story…”.
So, where did the money come from to pay off these debts? This is an interesting question that speaks to the fact that Southern debtors have more leverage right now than they used to, new power and opportunities rooted in ongoing changes in the financial and geopolitical landscape. In addition to using bitcoin alongside the US dollar to stabilize its long-term financial position—a fact that I imagine is making US leaders very worried about whether other countries might follow suit—El Salvador also tapped into funding from a smaller, regional development bank, the Central American Bank for Economic Integration, rather than meet the conditions set by the IMF. (The CABEI’s Board of Governors does not include a representative from the US or any other advanced Western economy).
It is also reasonable to infer that El Salvador was willing to take this risk because there are other governments outside the West willing to help out if needed. It is an unfortunate fact that major powers in the international system regularly use debt as a tool to discipline, control, and extract concessions from poorer and weaker states. But today there are multiple major powers competing for territory, resources, allies, and strategic advantages, rather than the system that prevailed in the past in which the US held sole superpower status. Viewed pragmatically, this shift in the international balance of power creates new opportunities for countries like El Salvador to play the Great Powers off one another in order to get financing on better terms than were possible in the past. To this point, while the US is still very much dominant in the region (and El Salvador’s most important export market), El Salvador has over the past few years grown closer to China. In 2018, before Bukele was elected, the Salvadoran government surprised the world by suspending diplomatic ties with Taiwan. In April 2019, news of a possible land-port-tax deal between El Salvador and China broke, prompting U.S. Ambassador Jean Manes to say that she was “alarmed by China’s strategic expansion” in Central America and “suggested China’s interest in the port had both economic and military aims”. In November 2022, with capital markets worrying about the potential for default, El Salvador further entered into trade talks with China.
Of course, there have been lots of serious and valid concerns raised over the past decade about China’s international development and foreign aid practices, including frequent accusations that China uses debt to “trap” smaller and poorer economies with “debt-for-infrastructure” deals. But it’s hard to deny that the current environment of financial policy innovation and geopolitical change is supporting greater, albeit still woefully insufficient, policy autonomy for countries that have not historically enjoyed this kind of economic independence.
In other news, I read a thoughtful piece about life in Pakistan that might be of interest, partly about the importance of having a sense of humor during difficult times. “We survive by using sarcasm so sharp it could slice steel,” wrote Pakistani journalist Zarrar Khuro this week for Al Jazeera.
Things I’m keeping an eye on:
1. Ukraine war: The US and Germany are sending tanks to Ukraine. Ukraine’s President Zelensky, who just fired a group of top officials over corruption allegations, thanked them and then asked for fighter jets. For its part, Russia responded violently in the face of what it sees as a NATO “escalation”. Defense stocks are looking at a banner year in 2023.
2. War games in the Taiwan Strait: This just keeps ramping up. More Chinese military exercises and patrols, more US funding for Taiwan’s defense, etc. And the new Speaker of the House in the US, Congressman Kevin McCarthy, is planning to visit Taiwan soon, following in the footsteps of former House leader Congresswoman Nancy Pelosi, who visited the island last August.
3. Upheaval in Peru: The situation continues to deteriorate, on the back of many months pf protests and unrest.
4. De-dollarization: Not unlike El Salvador, Brazil and Argentina are trying to work together to reduce dependence on the dollar by developing a common currency. Some observers are predicting a dramatic depreciation of the dollar in 2023, which would only expedite de-dollarization.
5. Race for space: China is going to build a space port in Djibouti, which is also host to China’s first overseas naval base.