El Salvador: Debt Burden Increases

Because the Debt/GDP ratio increased from 69.4% to 70.7% between 2018 and 2019, Fitch forecasts that, in the absence of additional fiscal adjustment, the debt burden will continue to grow in the coming years.

Thursday, October 3, 2019

A political stalemate leading to the failure of the 2020 budget proposal and the approval of the necessary external financing could lead to pressure on El Salvador's rating (B- / Stable), informed the risk rating agency.

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From the Fitch Ratings statement:

Fitch Ratings-New York-02 October 2019: Passage of El Salvador's newly released 2020 budget proposal in Congress will be a key political test for the administration of Nayib Bukele, who won election in February, says Fitch Ratings. The unchanged deficit target suggests limited appetite for fiscal consolidation.

Legislative approval of the budget and associated financing would signal Bukele's ability to work with the National Assembly and negotiate across party lines. This will be critical for governability given that his GANA party has only 11 members in the 84-seat assembly. ARENA has close to a majority with 37 seats. The FMLN has 23 seats.

Finding cross-party consensus on key fiscal issues will be vital considering that certain votes, such as for external debt authorization and the approval of loans for budget financing, require a two-thirds majority. Failure to pass the budget and the financing associated with it would be a deeply negative signal for policymaking and would result in a high level of uncertainty.

The deficit is set to rise in 2019 to 3.1% of GDP from 2.7% in 2018, counter to the general downward trend over the past decade. The deficit had fallen from 6.7% in 2009. Rising expenditure amid modest economic growth is a key contributor to the wider deficit this year. February's court ruling against the Financial Transaction Tax will also reduce government revenues by an estimated 0.5% of GDP.

As a result, we expect general government debt to GDP to rise to 70.7% in 2019 from 69.4% in 2018 and versus a 'B' rating category median of 58%. Without further fiscal adjustment, the debt burden would continue to gradually rise over the medium term.

However, appetite for this adjustment appears limited in the near term. The 2020 budget proposal targets an unchanged deficit 3.1% of GDP, implying both a gradual rise in debt-to-GDP and rising interest burden. Total non-financial public sector spending is seen increasing by 5.9% compared with the expected 2019 outturn, and versus forecast real GDP growth of 2.4%. This increases the challenge of reducing debt to 60% of GDP by 2030, consistent with the Fiscal Responsibility Law.

The IMF has suggested front-loading the fiscal adjustment in 2020-2021 with an overall adjustment of 2% of GDP, highlighting that a slower pace of adjustment would put the 60% of GDP target by 2030 at risk. However, the government seems reluctant to raise taxes owing to the effects on employment and economic growth. As such, the budget proposal largely focuses on boosting revenues through administrative measures while controlling costs by targeting subsidies and improving the debt profile by finding new sources of funding and using public-private partnerships for infrastructure projects.

A political stalemate leading to failure of the 2020 budget proposal and approval for necessary external financing could put pressure on El Salvador's rating (B-/Stable). The government's debt amortization profile will improve in 2020-2022 with no external commercial debt coming due, but the stock of short-term debt has risen in 2019. Failure to pass the budget signifies a reversion to the prior year's budget but would not include the associated financing, which would become a key source of pressure.

More on this topic

Panama: Fitch Downgrades Risk Outlook

February 2020

The rating agency maintained BBB's long-term issuer default rating, but decided to change the risk outlook from stable to negative, arguing that the debt burden will continue to increase in 2020.


The revision of Panama's Outlook to Negative reflects a marked deterioration in fiscal deficits and a significant increase of the government's debt burden, related to accumulation of arrears by previous administration and higher fiscal deficit targets under the modified Fiscal Responsibility Law. In addition, the recent greater-than-anticipated growth deceleration creates additional challenges for fiscal consolidation.

El Salvador: Risk Rating Confirmed

June 2019

"The 'B-' rating reflects the recent history of local currency defaults, as well as the political uncertainties influencing congressional approval of key economic reform measures."

This is the second consecutive year that the agency decided not to change the country's rating, as Fitch Ratings reported a year ago that it had decided to maintain the rating of foreign currency debt at "B-", and on that occasion argued that political tensions made it difficult to reach agreements on government financing.

El Salvador: Debt Rating Confirmed

June 2018

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. 

El Salvador's Debt Rating Downgraded Again

February 2017

In line with recent warnings issued by other credit rating agencies regarding the country's bleak fiscal outlook, Fitch has reduced the debt rating from B + to B, and changed the outlook to negative.

From a press release issued by Fitch Ratings:

Fitch Ratings-New York-01 February 2017: Fitch Ratings has downgraded El Salvador's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'B' from 'B+'.

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