El Salvador: Moody's Improves Risk Outlook

The rating agency kept the country's debt rating at B3, but decided to change the outlook from stable to positive, arguing that the government's liquidity risks have been substantially reduced.

Friday, March 13, 2020

The affirmation of El Salvador's B3 sovereign ratings reflects high public debt ratios and a growing interest burden, the rating agency said.

You may be interested in "Business Environment Improves in El Salvador"

From Moody's report:

New York, March 12, 2020 -- Moody's Investors Service, ("Moody's") has today changed the outlook on the Government of El Salvador's ratings to positive from stable. Concurrently, Moody's has affirmed the B3 issuer and long-term senior unsecured debt ratings.

The key factors driving the change in outlook are:

1. Materially reduced government liquidity risks

2. Improved business conditions that could lift private investment and economic growth

The affirmation of El Salvador's B3 sovereign ratings reflect high government debt ratios and a rising interest burden, as well as our view that El Salvador's institutions remain weak, given low fiscal policy effectiveness, in relation to its fiscal responsibility law, and weak rule of law. Persistent domestic security challenges as well as a history of political confrontations between the executive and legislative branches are incorporated into the current rating. El Salvador's B3 ratings also reflect economic dependence on remittances and low-value added exports to the US. Dollarization eliminates the risk of exchange rate shocks to the government balance sheet, but limits the authorities' policy options.

The long-term foreign-currency bond ceiling and the long-term foreign-currency deposit ceiling remain unchanged at B1. The short-term foreign currency bond and deposit ceilings remain at Not Prime.

The new administration was able to secure the necessary votes in the legislative assembly to pass its budget proposal last December and also to contract long-term debt to fund this year's fiscal deficit. This was a significant development since President Nayib Bukele, who took office in June 2019, has only a small party representation in the legislative assembly and a two-thirds majority vote is required to secure long-term financing.

For three consecutive years (2018-20), under two different administrations, the executive and the legislative branches have demonstrated they can work together to approve fully-funded budgets. In the past, animosity and political differences prevented parties from reaching agreements that were required to authorize budgets and long-term financing. This condition led to increased liquidity risks as it forced the government to issue higher amounts of short-term debt (LETES), prioritize payments and ultimately tested local banks' capacity to absorb rising levels of LETES.

Government liquidity risks are now significantly lower as the government is able to issue long-term debt in global financial markets and, consequently, has a reduced need to rely on LETES for budget financing. LETEs have hovered around $800-900 million for two years, although they reached $1 billion this January. Additionally, El Salvador faces a relatively benign debt amortization schedule over the next few years with not large debt payments coming due until 2023. Long-term debt amortizations will amount to about $500 million (1.8% of GDP) annually in 2020-22 and will increase in 2023 with a $1.1 billion (4.0% of GDP) Eurobond payment coming due that year.

El Salvador's relatively weak economic growth over the past decade, with GDP increasing at an average annual rate of 2.4% in 2010-19, is in part attributable to low investment rates which at 15% of GDP in 2010-19 compare with the B-rated median of 23%.

The new administration has taken steps to jumpstart private investment. In addition to improved dialogue with the business community, the authorities have reduced red tape and regulatory bottlenecks in order to improve business conditions. The government set up a new ministry dedicated to facilitate private sector investment, a decision that denotes an attitude which is in stark contrast with the approach followed by previous administrations.

The administration has also placed special attention in taking action to improve security. With evidence indicating that progress has been made on this front, this has been a key consideration behind companies decisions to conduct business in areas that were previously off limits.

If these initiatives are maintained, the ensuing positive momentum could support higher investment levels in the coming years contributing to lift growth above El Salvador's current 2% potential growth rate.



More on this topic

El Salvador's Eurobonds Issue Qualified

August 2019

After the country issued $1.097 million in Eurobonds for a 30-year term, Moody's gave them a "B3" rating, while Fitch Ratings assigned them a "B".

Fitch Ratings has assigned a 'B-' rating to El Salvador's $1.097 million notes due January 2050. The notes have a coupon of 7.1246%, the agency said.

Risk Rating and Investment Attraction

March 2019

The latest risk ratings for the issuance of long-term debt of Central American economies identify Panama as the most attractive country to invest in.

On March 8, Moody's decided to raise its long-term issuer rating in foreign currency from Baa2 to Baa1, arguing that the outlook remains more favorable in the medium term.

S&P Confirms Nicaragua's Debt Rating

February 2018

Standard & Poor's has maintained the rating of B+ for long-term sovereign debt, arguing that economic growth is stable and the burden of public debt remains moderate.

From a statement issued by Standard & Poor's:

On Feb. 16, 2018, S&P Global Ratings affirmed its 'B+' long-term local and foreign currency sovereign credit ratings on the Republic of Nicaragua.

El Salvador's "Restricted Default" Status Removed

May 2017

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. 

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