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[50] 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.
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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.
1894: A company called the Central American Public Works Company was registered by Mr. Mark J. Kelly in London, and Mr. Kelly was associated with Mr. Scherzer in carrying out this contract, and in the month of April a concession was obtained from the Government under which the contract of 1891 was cancelled. The Central American Public Works Company undertook to complete the line to Santa Ana; to build a branch from Sitio del Ni?o to[52] San Salvador (twenty-four miles), together with a deviation of one and a half miles at the port of Acajutla; to give the Government ￡70,000 in fully-paid ordinary shares of the company when issued; and to redeem the loans of 1889 and 1892. The Government, on its part, agreed to hand over to the Company the whole of the railways for a period of ninety-nine years, and to guarantee the Company for fifty years a net annual profit on working the railways of 6 per cent. upon the sum of ￡800,000, secured by a charge of 10 per cent. on the import duties.
A change of Government took place almost immediately afterwards, and, owing to the differences which then arose between the Government and the Company, the concession was declared void.
But in December a supplementary contract was entered into between the Company and the new Government, by which it was agreed that—(1) The ￡70,000 of shares of the Public Works Company were to be delivered to the Government by May 31, 1895 (this was done, and the Company took possession of the completed portion of the line and commenced the construction of the remainder); (2) the duration of the concession was shortened from ninety-nine to eighty years; (3) the guarantee was reduced from ￡48,000 a year to ￡24,000 during the construction of the line to Santa Ana, ￡36,000 during the construction to San Salvador, and the full ￡48,000 was not to be paid until the railway was entirely finished.
1898: In this year a new company, called the Salvador Railway Company, Limited, was formed to take over the concession from the Central American Public Works Company. Proposals were laid before the holders of the 1889 and 1892 loans to convert their bonds into mortgage debentures of the railway company.[53] Some of the 1889 bondholders, however, declined to signify their adherence to the scheme, and it was thus found impossible to arrange for the release of the mortgage on the first section of the railway. The Central American Public Works Company had, moreover, undertaken to deliver to the Government all the bonds by December, 1898; they therefore approached the Government with the object of securing further legislation in order to get over the difficulty. In this they were not at the time successful, and the Government declined to remit to the company the sum due under the guarantee for the half-year ending December 31, 1898. The funds for the payment of the February and August, 1898, coupons on the 1889 bonds were sent by the Government direct to the London and South-Western Bank. The November 1897 drawing and May 1898 coupons on the 1892 bonds, and the July 1898 drawing and February 1899 coupons on the 1889 bonds, were not paid.
1899: On February 8 of this year a further contract was entered into between the Government and Mr. Kelly, representing the Central American Public Works Company, of which the following were the principal provisions: (1) The company was to hand over to the Government for cancellation the outstanding 1889 and 1892 bonds (in round figures amounting to ￡725,000) within six months from the date of ratification of the contract by Congress. The company might, however, leave outstanding ￡60,000 of the bonds if they could not make delivery of the whole of them, but on these they were to pay on their own account the same interest (6 per cent.) and amortization (2 per cent.), as the Government was under obligation to do. (2) The Government was to pay the company for eighteen years from January 1, 1899,[54] a fixed annual subsidy of ￡24,000 in lieu of the previous guarantee, and to hand over all the railways free of charge. The subsidy was to be secured on 15 per cent. of the import duties, in respect of which the Government was to issue special Customs notes. These notes were to be handed to a bank named by the company, who were to sell them and collect the proceeds.
The railway company engaged themselves to complete the line to the Capital by June 30, 1900. If the bonds of the external debt were not handed over within the period stipulated, the Government was to have the right, subject to existing hypothecations, to take possession of the railways.
In April, 1899, an agreement was entered into between the Council of Foreign Bondholders, acting in conjunction with the Committee of 1889 bondholders, and the Central American Public Works Company, for the transfer to the Salvador Railway Company of the railways and concessions held by the Works Company, including the subsidy payable under the contract of February 8, 1899, on such terms as might be agreed between the Works Company and the railway company. The railway company were to issue (1) Prior lien debentures to the amount of ￡163,000, forming part of a total authorized issue of ￡250,000, and bearing 5 per cent. interest and 1 per cent. accumulative sinking fund, to be applied by purchase or drawings at par. Such issue to be for the purpose of providing the funds for the completion of railway, repairs, working capital, and expenses; (2) 5 per cent. mortgage debentures to the amount of ￡660,000, to provide for the cancellation of the outstanding bonds of the 1889 and 1892 loans, the debentures of the Public Works Company (￡150,000), and other claims.
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These debentures were to be redeemable by an accumulative sinking fund of 1 per cent. per annum, commencing from August 15, 1906, to be applied by purchases or drawings, at the price, in the case of drawings, of ￡103 for each ￡100 of debentures. The holders of the 1889 bonds were to receive, in respect of each ￡100 bond, ￡100 in mortgage debentures of the railway company, bearing interest from August 15, 1899. The 1889 bonds were deposited with the Council against the issue of negotiable receipts, with two coupons of ￡2 10s. each attached, payable out of the first two instalments of the subsidy in respect of the coupons on each bond of ￡100, due February 15 and August 15, 1899.
This arrangement was accepted by the holders of the bonds of the 1889 and 1892 loans, who by the necessary majorities authorized the trustees of the loans to release the respective mortgages. It was also approved by the holders of the debentures of the Public Works Company, and was duly carried into effect.
STATEMENT OF REVENUE AND EXPENDITURE FOR THE LAST TEN YEARS.
Year. Expenditure. Deficit.
$ $ $
1901 7,556,721.56 7,284,264.51 727,542.95
1902 6,702,021.70 8,459,460.84 1,757,439.14
1903 6,792,045.69 7,704,756.34 912,710.65
1904 8,060,689.05 8,759,404.63 698,715.58
1905; 8,536,443.07 10,045,413.03 1,508,969.96
1906 8,484,419.78 12,246,825.76 3,762,405.98
1907 8,669,189.12 11,389,642.40 2,720,453.28
1908 10,676,338.92 12,656,656.61 1,980,317.69
1909 10,776,028.65 11,856,002.21 1,139,903.56
1910 10,620,865.57 13,027,546.96 2,406,681.39
$85,814,833.11 $103,429,973.49 $17,615,140.28
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It will be observed that, while the general revenue of the Republic had expanded considerably during the past decade, having, indeed, increased about 50 per cent., the expenditure had, unfortunately, expanded also, and to a greater degree, leaving an annually increasing deficit to be met. The reason for this during the latter few years is clear—the unfortunate political troubles which were thrust upon the Republic by the acts of certain revolutionists instigated by the evil genius of Central America, ex-President J. Santos Zelaya, and which turned what might have been a fairly profitable period into a disastrous one, from a financial aspect.
Nevertheless, there is no reason to adopt a despairing view of the Salvadorean national finances, since the resources of the country are very elastic, and their development is but in its infancy.
It is much to the credit of the Government, both the present and that which was lately in office, that the situation should have been so boldly and frankly met, the whole position being explained and true reasons given. Everyone must think the better of the authorities for their honesty in dealing with the nation, an honesty which is, unfortunately, rare, not alone among Latin-American States, but also among European Governments of much older growth and wider experience. Don Manuel Lopez Mencia, the ex-Minister of Finance, who is a thoroughly capable and experienced financier, fully grasped the necessities of the situation, and before retiring from office freely criticized his own Department, offering many valuable and timely suggestions for improving it and for placing the finances of the country upon a more satisfactory basis. I believe that the present year (1911)[57] is destined to afford a much more encouraging condition, and a continuation of the present economical and severe retrenchment policy in force; the deficit, which has made an unwelcome appearance in each year\'s accounts over a period of a whole decade, will gradually give place to a surplus. Naturally, all depends upon internal peace being preserved and freedom from foreign political troubles; both of which, happily, at the time of writing seem to be well assured.
In regard to the general financial conditions of Salvador, which are at the present time in a much more satisfactory state, the following particulars will be of interest:
PUBLIC DEBT.
The composition of the Public Debt on December 31, 1909, stood as follows:
Gold Liabilities.
$ Gold $ Gold.
Sundry cash creditors 906,585
Bills payable 363,545
National indemnity bonds 73,656
External loan principal 4,744,000
External loan interest and expenses 3,657,694
8,401,694
$9,745,480 Gold.
= at 150 premium, $24,363,700 Silver.
Silver Liabilities.
$ Silver.
Sundry creditors 930,550
Salvador bonds (principal and interest) 3,564,207
Administrative salaries, expenses, etc. 836,299
Deposits 2,629
Funds to be applied to special purposes 88,022
Various bonds 113,140
5,534,848
Total $29,898,548 Silver.
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The Public Debt of the Republic of Salvador on December 31, 1901, amounted to $10,666,584 (gold) = ￡2,133,517, and $6,207,059 (silver) = ￡517,256. Reduced to the silver unit, the total Debt amounted to $32,873,520.
The Customs Revenues for 1910 show a small decline over those of 1909, the difference being $3,784.00.
Import Duties. Export Duties.
Sonsonate $3,522,875.05 $430,359.84
La Unión $1,086,766.03 $114,528.03
La Libertad $554,400.57 $125,926.49
Import Duties at the General Treasury (parcels post) $169,638.59 Imports at El Triunfo $215,835.19
Totals[2] $5,333,680.24 $886,649.55
The Government\'s whole Revenue during the first half of 1910 amounted to $2,972,501 (gold), and its expenditure to $2,677,431 (gold).
The total import and export duties for the two years 1909 and 1910 are as follows:
1909. 1910.
Imports $4,176,931.56 Imports $3,745,249.19
Exports $8,481,787.65 Exports $9,122,295.09
(These figures are in U.S. gold currency.)
BUDGET FOR 1910-11.
The estimates for the financial year 1910-11, approved by the National Assembly, and published in the Diario Oficial of June 6, 1910,[3] were practically identical with those for the preceding year.
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The details are shown below:
ESTIMATES OF REVENUE, 1910-11.
Customs Revenue.
Imports: $ Silver.
Import duties 3,100,000
Fiscal tax of 30 per cent. 600,000
Taxes of $3.60, $2.40, and $0.50 gold per 100 kilos 1,952,500
Storage, etc. 285,000
Sundry receipts 148,500
Exports:
Coffee export duty of $0.40 gold per 46 kilos 600,000
Coffee export duty of $0.121?2 for internal development in the Capital 75,000
Coffee transit permits 80,175
Tax of $1.50 per 100 kilos in favour of Central Railway 4,000
Sundry receipts 66,557
Internal Revenue.
Liquor tax 2,500,000
Stamps and stamped paper 264,500
Internal Excise 126,500
Post-Offices, Telegraphs, and Telephones 270,250
National Printing-Office 25,000
Penitentiaries 30,000
Powder, saltpetre, and cartridges 65,000
Public Registry 38,000
Sundry receipts 88,800
Total $10,319,782
ESTIMATES OF EXPENDITURE, 1910-11.
$ Silver.
National Assembly 40,980
Presidency of the Republic 41,340
Department of Finance 670,256
Department of Internal Development 636,800
Department of Government 1,250,463
Department of Foreign Affairs 116,080
Department of Justice 507,192
Department of Public Instruction 714,652
Department of Beneficence 529,336
Department of War and Marine 2,573,510
Department of Public Credit 3,291,260
Total $10,371,869
SUMMARY.
Revenue $10,319,782
Expenditure 10,371,869
Estimated deficit $52,087
In regard to this Estimated Deficit, which in any case is very small, it is to be mentioned that in November of this year (1911) an additional export tax upon coffee, of 30 cents (gold) per 100 kilogrammes comes into effect, although only for two years, and it is expected to produce $180,000 (gold). This additional revenue will wipe out the small anticipated deficit, and leave a considerable surplus, for the present year.
ditto
Artillery
Artillery on Parade Ground, San Salvador Barracks.