Nayib Bukele — SELL

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With a headline like that, naturally, El Salvador’s dollar bonds will most likely rally hard from here.

But we would note that the ‘One, Big Beautiful Bill‘, released on Monday, proposes a US federal remittances tax.

According to the House Ways and Means Committee:

This provision imposes a five per cent excise tax on remittance transfers which will be paid for by the sender with respect to such transfers?.?.?. The provision also creates an exception for remittance transfers that are sent by verified U.S. citizens or U.S. nationals by way of qualified remittance transfer providers.

Remittances to El Salvador, a small, highly dollarised economy that Bukele is pivoting from a failed bitcoin experiment shut down by the IMF to being an offshore prison for US undesirables, amount to about a quarter of GDP, which would be $8bn this year.

Mexico also depends a lot on remittances — the $65bn or so the country received last year more or less balanced its current account — but overall they amount to less than 4 per cent of Mexican GDP by contrast.

In El Salvador, remittances drive the private consumption that makes up most of the country’s real GDP growth. One in five Salvadoran households receives them. They pump dollars into circulation, put deposits into banks, and stop the current account deficit from going into double digits.

In short, remittances are important enough to paying El Salvador’s debt that its bond prospectuses detail them as a risk factor. (Incidentally, less than two per cent of Salvadoran remittances are in crypto.)

How much is a tax going to change these flows?

Remittances are of course generally seen as a function of bigger economic factors, such as the health of the US labour market and risk of deportation. (And currency risk, but that’s another story.)

On the latter, US remittances to El Salvador and other countries have recently accelerated, a sign that migrants are trying to frontload money movements home before they might have to leave. A similar trend was seen in Trump’s first term. On the other hand, Salvadoran migrants benefited when the previous administration extended Temporary Protected Status for them into next year.

As for US unemployment, that’s anyone’s guess in a trade war that blows hot and cold by the day, but in March the IMF acknowledged a “significant downside risk” for El Salvador’s economy if the US construction and manufacturing sectors decline.

“A doubling of the Salvadoran migrants’ unemployment rate, to 7 per cent (from 3.5 per cent in 2019), is estimated to reduce real remittances per migrant by 11 per cent, which would lead to a drop in remittances inflows by 6 per cent of GDP,” the fund said.

Possibly that also gives a ballpark for what a 5 per cent reduction in flows through a tax might mean if it can’t be avoided. Compared to that tax rate, it cost 2 per cent to remit to El Salvador in 2023, according to World Bank data.

Meanwhile, in terms of access to the tax’s envisaged exception, about one-third of the Salvadoran immigrant population were naturalised US citizens as of 2023, according to the Migration Policy Institute.

Migrant remittances are hugely sensitive to transaction costs (something you learn covering southern Africa, the region with the highest such costs in the world). There could be informal routes to avoid a tax, which is naturally a risk that money service providers have raised in lobbying against the provision in the House bill.

It’s still a risk to consider for an unusually exposed sovereign credit.

El Salvador paper won’t blow up tomorrow, and a US remittances tax won’t push it over the edge. On the other hand, you are not paid that much for Salvadoran risk as you were before, even with an IMF bailout as a safety net.

The debt’s spread to Treasuries is less than 500 basis points, down from well over 3,000 basis points a few years ago. You could get a 9.4 per cent yield on El Salvador bonds due 2054 — but you can get 9.1 per cent on a Colombian bond due the same year.

Portfolio investment flows to the developing world are fickle. Remittance flows are often just as big, stickier, but are less appreciated.

If the US had proposed a 5 per cent outbound tax on some other capital flow, it would be getting a lot more attention given the Zeitgeist of Mar-a-Lago Accord chatter and ‘geoeconomics’.

But since it’s migrants, no one will particularly care.