Salvador of the Twentieth Century

by Percy F. Martin

CHAPTER IV

Government finances—London Market appreciation of Salvador bonds—History of foreign debt—Salvador Railway security—Central American Public Works Company—Changing the guarantee—Financial conditions to-day—Public debt at end of 1909—Budget for 1910-11—Small deficit may be converted into a surplus—Summary.

The high opinion which the London Market entertains regarding Salvadorean Government securities is shown by the price at which they are quoted; and although judged upon their merits, these same securities are rather too cheaply priced, they form a marked contrast to some of the neighbouring States' foreign loans, such, for instance, as Costa Rica and Honduras. As a matter of fact, the Salvadorean Governments of successive years have strictly and faithfully performed their foreign obligations; and it has been the firm policy of past Presidents, as it is of the present Executive, to maintain their foreign credit upon an unassailable basis. It is possible to speak very encouragingly of the Salvador 6 per cent. Sterling Bonds, which were issued in March, 1908, at 86 per cent., and which are at the present time of writing quoted at or a little above par. Their desirability as an investment depends upon the standard of security they afford—on the probability, that is, that Salvador will faithfully fulfil its obligations. The Salvador Government 6 per cent. Sterling Bonds (1908), amounting to £1,000,000, were issued to meet the cost of certain public works and to repay certain local loans contracted at a higher rate of interest. The loan is redeemable by an accumulative sinking fund of 2¹⁄₂ per cent., by purchase or drawing, and is secured by a first charge on—(a) the special Customs duty of $3.60 (U.S. gold) per 100 kilogrammes of imported merchandise; and (b) the duty of 40 cents (U.S. gold) per quintal (up to 500,000 quintals) of the annual export of coffee, the proceeds of which are remitted fortnightly to the London Bank of Mexico and South America, whose Chairman stated recently that "the rapid way in which the remittances are coming forward is very satisfactory, and will, no doubt, in time improve the credit of this small but hard-working country." The bonds constitute the whole External Debt of the country, previous loans having been commuted in 1899 for debentures of the Salvador Railway Company, to which the Government pays an annual subsidy of £24,000. This subsidy has now been punctually remitted for over nine years. It is on such grounds as these that the friends of Salvador maintain that the value of the bonds should not be gauged by the financial reputation of some of the other Central American Republics.

It may be interesting to trace the whole history of Salvador's foreign indebtedness, which commenced as far back as 1827. The record—by no means an unworthy one—is as follows:

1827: Of the debt of the Central American Federation—which was composed of Salvador, Guatemala, Costa Rica, Honduras, and Nicaragua, and amounting to £163,000—the proportion which was assumed by Salvador was one-sixth, £27,200.

1828-1859: No interest was paid during this long period of turbulence and strife.

1860: Salvador compromised her share of the debt for 90 per cent. paid in cash.

1889: A loan for £300,000 was issued, bearing 6 per cent. interest and 2 per cent. accumulative sinking fund. It was offered by the London and South-Western Bank at 95¹⁄₂ per cent., and was specially secured on 10 per cent. of the Customs duties and the rights of the Government on the railway from Acajutla to Ateos (thirty-five miles), and in the proposed extension to San Salvador. Out of the proceeds of the loan a mortgage of the Government's interest in the portion of the railroad already constructed (Acajutla to Sonsonate), amounting to £183,000, was paid off. The extension of the railway was only continued for a distance of seven miles from Ateos to La Ceiba.

1892: Bonds for an amount of £500,000, bearing 6 per cent. interest and 1 per cent. accumulative sinking fund, were created by the Government and issued by Messrs. Brown, Janson and Co. to the contractor Mr. A. J. Scherzer, in pursuance of a contract made by the Government with Mr. Scherzer in 1891, for the purpose of the extension of the railway. These bonds were specially secured on 10 per cent. of the Customs duties, and also by a first mortgage on the railway line from Ateos to Santa Ana (thirty miles) when built. These bonds were not issued to the public, but were delivered from time to time to the contractor, against the engineer's certificates, as the works proceeded.