El Salvador Still at Risk of Default

El Salvador's 'CCC' Long-Term ratings reflect Fitch's assessment that political polarization complicating the sovereign's ability to meet its financing gap for 2017-2018, continues, highlighting the risk for default.

Tuesday, August 1, 2017

From a statement issued by Fitch Ratings:

Fitch Ratings-New York-28 July 2017: Fitch Ratings has affirmed El Salvador's Long-Term Foreign and Local Currency IDRs at 'CCC'. The issue ratings on El Salvador's senior unsecured bonds are also affirmed at 'CCC'. The Country Ceiling is affirmed at 'B-' and the Short-Term Foreign and Local Currency IDR at 'C'.

El Salvador's 'CCC' Long-Term ratings reflect Fitch's assessment that political polarization complicating the sovereign's ability to meet its financing gap for 2017-2018, continues, highlighting the risk for default. The government has defaulted on Certificados de Inversion Previsionales (CIPs, debt issued to the local pension funds under domestic law) due in April 2017. Although the government cured the default in early May and made the principal and interest payment on the CIPs due in July, payments of over $80 million are due in October, which could again test the government's ability to reallocate resources from the budget. It has already done so twice in 2017 and budget flexibility is limited.

The government issued USD601 million in Eurobonds in February, which is less than half of its estimated USD1.3 billion in financing needs for 2017. The government could continue to build the stock of Letes (short-term instruments) during the year, increase arrears and make ad hoc adjustments to spending. However, this does not sustainably reduce the risks around meeting its financing needs in a credible manner. Local sources of financing are limited. The banking system (the primary buyer of Letes) is reluctant to increase its exposure to the government given the default on local debt in April and the private pension system is nearing the 45% legal limit on exposure to the CIPs.

A two-thirds majority in congress is needed to secure approval for long-term borrowing, which has not proven possible given strong resistance from the main opposition party, Arena, which has linked its approval for issuance to a commitment to reduce the fiscal deficit. Upcoming congressional elections in March 2018 followed by presidential elections in February 2019 further complicate the likelihood of political agreement.

El Salvador's ratings reflect the sovereign's severe financing constraints and lack of progress on reforms to arrest the deterioration of public finances as a result of extreme political polarization and gridlock. Fitch expects continued fiscal deficits of near 3% of GDP and low growth of around 2.3% to keep the general government debt on an upward trajectory in 2018-19 from an estimated 62.7% of GDP in 2017. The Congress is debating reform to the pension system, which has been a key source of fiscal pressure, representing nearly 2/3 of the fiscal deficit and 1/3 of the entire government debt burden.

El Salvador's macroeconomic stability supported by dollarization and its relatively sound banking system are relative credit strengths. El Salvador has higher per capita income, social development and governance indicators relative to peers.

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From a press release issued by Fitch Ratings:

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From the press release by Fitch Ratings:

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