El Salvador - Market Challenges El Salvador-Market Challenges
Challenges remain and the most recent data from the Salvadoran Central Reserve Bank reported net foreign direct investment (FDI) inflows at $2.4 billion in El Salvador in 2018, the United States accounts for one quarter of El Salvador’s overall FDI stock (second only to Panama). U.S. textile companies are the largest single employers in the country. This FDI level is improved from 2017 during which time FDI was below $1 billion, the lowest in the region. President Bukele recognizes the importance of improving the investment climate and has pledged investment activities to change the perception of the country.
Leading causes contributing to the lack of FDI include inconsistency in enforcing commercial law, corruption, and the policies of the previous FMLN administration which were often seen as not working for a stable and friendly business environment. While the security situation also contributes to the lack of FDI, the security situation has improved in recent years. For 2018, the International Monetary Fund (IMF) forecasts a GDP growth rate of 2.5% in 2019 and is expected to drop to a 2.2% growth rate through 2024. The business sector remains worried about the country’s low growth rate, corruption, and security situation.
The country’s investment ranking also fell.
Corruption remains a problem in El Salvador, which scored 35 points out of 100 on the 2018 Corruption Perceptions Index reported by Transparency International’s Corruption Perceptions Index, which scores countries on their perceived levels of corruption. Soliciting, offering, or accepting a bribe are considered criminal acts and U.S. companies doing business in El Salvador are subject to the United States Foreign Corrupt Practices Act (FCPA).
In terms of U.S. exports to El Salvador, market entry requirements for importing goods and services are often related to environmental controls, consumer protection, and controlled products. U.S. and local companies have complained about customs and non-tariff barriers, including customs valuation, tariff code reclassification, labeling requirements, and the inconsistent application of customs regulations. Despite this, notable improvements have occurred in 2018 including simplification of customs procedures and improvements in getting products through at some border crossings.
El Salvador’s procurement law calls for competitive contracts and applies to all Salvadoran public institutions. President Bukele will need to improve the perception of the competitive bidding and contracting process which tended to favor no bid contracts or shortlist contracts under the previous administration.
In August 2018, the FMLN Government discontinued diplomatic recognition of Taiwan in favor of the People’s Republic of China (PRC) following a trend of some of its neighbors and CAFTA-DR countries including Panama, Costa Rica, and the Dominican Republic. The move to recognize the PRC and subsequent decisions made by the FMLN administration have raised concern about lack of transparency and corruption in any PRC-related business deals. It is not yet clear whether or how the Bukele administration will reevaluate El Salvador’s relationship with the PRC.
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