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Business Implications of El Salvador and Costa Rica Votes

LBC looks at what to expect in the two countries after recent elections.

On Thursday, El Salvador released final results confirming Salvador Sánchez Cerén of the left-wing FMLN (Farabundo Martí Liberation Front) as victor. Meanwhile, In Costa Rica - which also faces a run-off election after February 2 presidential elections failed to yield a winner - candidate Johnny Araya of the incumbent PLN (National Liberation Party) withdrew his candidacy, paving the way for the victory of Luis Guillermo Solis of the minor PAC (Citizens’ Action Party).

With these two elections all but decided, LBC spoke with Franco Uccelli, Executive Director of Emerging Markets Research at J.P. Morgan about the economic implications of both elections.

In El Salvador, Sánchez Cerén, a former Marxist guerrilla received 50.11 percent of the 3 million votes cast compared with 49.89 percent for former San Salvador mayor Norman Quijano of the conservative ARENA (National Republican Alliance) – or a difference of a little under 7,000 votes. The two candidates faced one another in a run-off election after no candidate received a majority vote in the country’s first-round vote on February 2. This outcome flew in the face of pre-election polls which predicted a comfortable double-digit lead for Sánchez Cerén.

Analysts credit the tighter than predicted victory on voters from the former third candidate – Tony Saca – switching allegiance to Quijano between the first and second rounds, as well as a clever media campaign by ARENA which tied ongoing protests and unrest in Venezuela to Sánchez Cerén, alleging he was an ideologue in the style of the late Hugo Chávez.

Indeed, given Sánchez Cerén’s past, some had posited that his win would spell a “left turn” for the country, which for the past five years has been run by the more centrist FMLN politician Mauricio Funes. Experts consulted by LBC downplayed this before the March 9 vote. Now, given that vote’s outcome, a left turn seems even less likely, with Salvadorans far from giving Sánchez Cerén a mandate to introduce the kind of changes he might have.

“The new administration should be somewhere between moderate left and radical left,” says Uccelli of JP Morgan. Current president Mauricio Funes, widely considered more moderate than the party’s old guard, focused on social investment, including providing meals in schools and aid to women which have proven popular.

Sánchez Cerén has promised to keep these programs, and may try to expand them, says Uccelli. He has also promised to create jobs, foment small business, and employ a “mano inteligente” approach to crime, favoring strengthening the police over the military in combating transnational drug crime. University of Scranton Professor Mike Allison, who spoke with LBC in February, also says the FMLN would be more sensitive to environmental concerns and opposed to opening mining in the country, a fact which could have economic implications for the country which has suffered sluggish economic growth in recent years.

“Times have changed for left-wing leaders in the region, and it’s really difficult to enact a left-wing platform unless you’re sitting on significant energy or mineral reserves., says Uccelli. ”Plus, given El Salvador’s dependence on the United States,” – both in aid and remittances –“no president of El Salvador could afford to antagonize the country, especially since countries like Venezuela are much less generous than they used to be,” he adds.

These facts, plus the narrowness of the win, should show Sánchez Cerén that Salvadorans do not wish to follow the Bolivarian model.

Meanwhile in Costa Rica, the withdrawal of Johnny Araya from the race has paved the way for Luis Guillermo Solis to coast to victory on April 6: while Araya has withdrawn from the race, his name will still appear on the ballot. Araya trailed Solis in recent polls by almost 40 percentage points.

Solis, a former diplomat, ran on an anti-corruption campaign, a theme that has become very popular with Costa Ricans due to the numerous corruption scandals that plagued the current administration of Laura Chinchilla. Solis promised to improve the country's infrastructure and attract more foreign investment, but promised to also be more environmentally friendly. His victory will bring his party – the PAC – the presidency for the first time. “The market knew what to expect from the [incumbent] PLN, but the PAC is a bit of an unknown quantity,” Uccelli said.

Coming from a smaller party, Solis will also face challenges in getting his legislation through Congress, as his party lacks a majority.

“The real question for the market is how Solis will deal with fiscal policy,” he added, and noted the candidate has proposed very little other than a promise not to raise taxes in his first years in office. Costa Rica currently faces fiscal challenges due to sluggish economic growth and government debt that has grown significantly under the current administration. In September 2013, Moody’s put the country’s economic outlook to negative citing widening fiscal deficits, rising debt, and the government’s failure to pass fiscal reform.

“If the situation becomes more dire, maybe he will have to backtrack – but if he does stick to his promises, we could see some negative effects on bond prices.”

Still, Solis has a month left to present further details of what his presidency might look like. “Maybe in the coming weeks we’ll see what he has to say,” says Uccelli. 

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