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Salvadoran bonds may be better than you might think

Wednesday, December 5, 2012


El Salvador's recent $800 million bond issue was well received by world financial markets. Originally slated to raise $500 million, within three hours of the offer being issued in New York, there were $5 billion in requests.

Why the urge to buy the paper of a country with the lowest growth rate in Central America, and low levels of direct capital investment, along with a reputation for violent gang warfare?

In fact, investors were attracted by a yield of almost 6 percent, which compares favorably with 2.5 percent on similar issues from Mexico.

Also, El Salvador’s bad publicity may be worse than the reality.

Few Salvadorans are wealthy, but they enjoy a better standard of living than their counterparts in Nicaragua, Honduras and Guatemala.

Violence has eased considerably following an August truce, negotiated among gangs, government and the Catholic Church.

For its part, the Heritage Foundation, a Washington-based conservative think-tank, recently put El Salvador in third place among Latin American nations in its 2012 Economic Freedom Index.

Only Chile and Uruguay scored higher.

The foundation was sniffy about the "anti-business rhetoric" of the left-wing government of President Mauricio Funes.

More important, however, was a climate of "overall competitiveness… promoted and sustained by a restrained and sensible regulatory environment and open-market policies that support trade and investment."

That's what investors like to hear. El Salvador's economy may be stagnant. But if investors are right, a revival is coming.