Fitch Ratings has kept the debt rating in foreign currency at "B-", arguing that political tension has been reduced following the pension reform approved in October last year and the budget passed in January of this year.
Fitch Ratings-New York-13 June 2018: Fitch Ratings has affirmed El Salvador's long-term, foreign-currency Issuer Default Rating (IDR) at 'B-' with a Stable Outlook.
The IMF believes that the financial stability framework is not well prepared to handle a potential systemic financial crisis without seriously compromising fiscal resources.
In a review carried out late last year, the International Monetary Fund identified serious vulnerabilities in the pension sector, secondary markets and crisis management mechanisms and stated that they need to be taken care of immediately.
The key factor driving the rating upgrade is the significant reduction of the government liquidity risks, as political agreements have led to Congress´approval of long-term government financing and pension reform.
Risk rating firm Moody's announced on Friday, February 23 that El Salvador's debt was rated B3, which represents an improvement from the previous rating of Caa1.However, the country is still considered an issuer with risk of not fulfilling its obligations.
Fitch Ratings has raised the Salvadoran debt rating to CCC, but warned that political polarization could continue to affect the approval of new long-term loans.
The decision to raise the IDR risk rating in local currency was taken by Fitch Ratings after the government paid interest on Pension Funds Certificates (CIPs) to private pension funds on April 28.
More expensive external credit, deterioration of the country's image, and higher local interest rates are just some of the consequences that could result from the non-payment of $55 million to pension funds.
The decision taken by the Sánchez Cerén administration not to pay interest to pension funds on the grounds of lack of support from the opposition political party has caused not only a down grading of the debt rating by agencies such as Fitch Ratings and Standard & Poor's, but has also led the business sector to raise its voice about the seriousness of the situation and to warn about possible consequences on economic activity.
The Ministry of Finance is reviewing eliminating life annuities, a benefit which affects about 130 thousand people, in place thanks to a decree by the government of Elias Saca.
Elsalvador.com reports that "According to a study on pensions which the Treasury, along with other institutions, is working on, decree number 100 has cost the Government $6 billion, an amount which must be financed by Salvadoran taxpayers."
The Law on FONAVIPO Investment Certificates exempts the institution from registering as a securities issuer and from rating the risk of its bonds.
The Law passed a few days ago bailsout the Fondo Nacional de Vivienda Popular (Fonavipo).
... "The measure contradicts the current Law on the Pension Savings System, indicating that AFP's can not acquire financial instruments which are "low grade", as is the case of FONAVIPO securities to be issued since July, with the institution being graded by Fitch Ratings as "D" with low ability to pay ", reported Elsalvador.com.
The obligation to satisfy the state’s appetite for money is compromising the profitability of pension operators and the size of contributor’s future pensions.
A statement by the Salvadoran Foundation for Economic and Social Development (FUSADES) reads:
The dilemma of pension fund investments
Background
In 1998 pension reform began in the country, with the creation of the Pension Savings System (SAP in Spanish), pension funds and companies to manage them. In these thirteen years, there have been several reforms that have changed the substance of its operation.
The loans are intended to support pension system and financial sector reform, and to help the country cope with natural disasters.
The Inter-American Development Bank (IDB) has approved three loans to Honduras for a total of $180 million to support reforms to the pension system and financial sector, and to help the country cope with natural disasters.
Three years after its creation, the fund's income exceeds $1.5 billion.
Savings accumulated by Salvadoran workers, which make up 25% of the country's GDP, have grown steadily since 1998, the year in which the Pension Savings system was created.
Despite the important growth that the regime has shown in the last two years, one of the main challenges for the pensions sector is to increase the number of members, as well as attract workers from industries such as farming, informal retail and independent professionals.
A slight increase in the value of pension funds was observed in the months of December and January.
In his article for NACION.com, Patrician Leitón writes, "For example, the historical real values of the obligatory complementary public pension system, “ROP,” grew from 3.55% in November to 3.61% in December and to 3.71% in January. December and January are the first months since February 2007 in which the real monthly value was a little higher than that of the previous month.”
The Government of Costa Rica is putting emphasis on social spending and investment in public works as measures to deal with the contraction of the economy.
Labor flexibility, expansion of unemployment benefits, adjustment of rates for credit at state banks, the reduction of work hours, increase in pension benefits, are some of the measures announced in the "Plan Escudo" (Shield Plan).
A fall in the yields of Costa Rican pension funds, and increases in their costs, are hitting their profits. Pension fund members are losing out too, indirectly.
The pension funds racked up 2.5 billion colons (US$8 million), some 3 billion colons less than in the same period of last year. Most funds say they are having to spend more to attract members and hold on to them.