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+'.
The government and the opposition have finally reached an agreement and approved the Fiscal Responsibility Law along with the issuance of $550 million in debt securities.
The issuance authorized by the Assembly may be made on the international or local market, and funds will be used to pay principal and interest on short-term debt, budget support and strengthening of the Fiscal Fund at the General Treasury of the Republic.
The government and the opposition have agreed to approve in the first instance an issue of $550 million, not $1.2 billion as claimed by the administration of Sanchez Ceren.
Although the government insists that there is a need is to issue $1.2 billion to cover short - term debts and solve the liquidity problem it is facing, this first agreement to issue $550 million will serve to"... pay for the electricity subsidy for FODES and the mayoral districts."
A state of emergency has been declared and pressure has been put on the Assembly to approve borrowing in the order of $1.2 billion to honor short-term debts.
President Sanchez Ceren announced as a first step a declaratory emergency, so that before the close of 2016 they can 'attend to, discuss and build the best agreements that will provide the relevant results' on issues such as approval of bonds for $1.2 billion.With that amount the government hopes to deal with the illiquidity and respond to the state's short - term commitments.
Once again a warning has been given that without a fiscal agreement the country is at high risk of falling into debt default and losing access to international funding.
Elsalvador.com reports that "...Pedro Argumedo, from the Department of Economic and Social Studies at Fusades, said it is important to reach a Tax Agreement, as failure to do so would lead to consequences that would be 'terrible', and time is growing ever shorter."
The government has already reached 72% of the maximum amount of issuance of Treasury Bills that is permitted by law, and it only has $370 million available to borrow this year.
Given the critical fiscal situation, the Sanchez Ceren administration is insisting in the Legislature on the approval of a bill to issue another $1.2 billion in debt.According to the government, several commitments can not meet unless these funds are available.For the remainder of the year the only remaining possibility is the issuance of $370 million in short-term debt in the local market.
The delay in payments to suppliers to the state, corresponding to July, reflects the complicated situation of public finances in El Salvador.
Arguing that"... July was a very bad month fiscally," Finance Minister Carlos Caceres, justified the delay in payment to suppliers of goods and services. According to the minister, in July the government "... had to pay $260million in external debt and Treasury bills."
The inability to carry out the issuance of $900 million further limits the possibilities of solving the fiscal problem affecting the country.
The Sanchez Ceren administration had intended to use the proceeds to refinance debt, pay pensions of officials and allocate funds to the Ministry of Education, according to the explanation given by the authorities at the Ministry of Finance.
The country continues to experience significantly lower growth than its neighboring countries in a context of low investment, high emigration, low competitiveness and political paralysis, and with significant fiscal pressures.
From the IMF report:
Main policy issues
- Raising potential growth will require far-reaching structural reforms to foster competitiveness and investment, supported by measures to reduce crime and regulatory uncertainty.
From 2014 to 2015 the size of central governments remained constant at an average 18.5% of gross domestic product (GDP).
From the introduction of the report: "Macrofiscal Profiles: 6th Edition" by the Central American Institute for Fiscal Studies (Icefi):
2015 proved to be a period of low tax advance for the Central American region. On average, the size of central governments remained constant compared to 2014, at 18.5% of gross domestic product (GDP). However, not all nations maintained this trend in the same way. While the governments of Nicaragua, Costa Rica and El Salvador, some of the largest fiscally in the region, continued to increase their participation in the economy, reporting increases of 1.5, 0.7 and 0.7% of GDP, respectively, the Government of Guatemala - one of the smallest in the world became even smaller, being reduced by 1.2% of GDP. For its part, the Government of Honduras reported a small decrease of 0.2% of GDP, fully converged with its policy of fiscal austerity, while that of Panama had a transient contraction of 1.4%, reflecting a reorganization established by the new administration and that, according to the plans for 2016, will be reversed in full.
As in old fashioned patriarchal homes, if there must be suffering, the first to suffer are the stepchildren, and only afterwards, if necessary, the legitimate children.
EDITORIAL
The announcement by the Solis administration that it has a plan B in case it does not manage to get legislative approval for the proposed tax increases designed to address the serious and growing fiscal deficit, highlights the existence in Costa Rica of first class citizens and second class citizens.
Very dark is the future of a country where the rulers do not lift their gaze beyond the few years of the mandate conferred on them by citizens.
EDITORIAL
The president of Costa Rica prefers short-term actions to address the fiscal crisis, while leaving open the tap of privileged public wages by which the future of the nation drowns through.
It is clear that immediate measures need to be taken such as reducing tax evasion and smuggling, and cutting abusive pensions. And it is quite possible that in order to maintain the rule of law taxes also need to be raised. But not closing, RIGHT NOW the growing cascade of state payroll costs that is multiplying every year, means mortgaging the future of the Costa Rican economy. However, president Solis postpones dealing with the topic, because its impact would be felt "only after 15 or 18 years."
With the exception of improvements in Nicaragua and Honduras, in the rest of the Central American countries problems in public finances range from latent in Panama and already serious in Guatemala, to critical in Costa Rica and El Salvador.
From the report "Macrofiscal Profiles: 4th Edition" by the Central American Institute for Fiscal Studies (Icefi):
"Fiscal accounts for 2015 anticipate an additional burden of concerns about the sustainability of the public finances of the governments of the region."
From a report entitled "Macrofiscal Profiles: 3rd Edition" by the Central American Institute for Fiscal Studies (Icefi):
The close of fiscal year 2014 has left more uncertainties than certainties in the current panorama for Central America.
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