Standard & Poor's has lowered its debt rating to SD after the Legislative Assembly approved a pension reform which includes a restructuring of government debt.
From a statement issued by Standard & Poor´s:
El Salvador's Congress approved amendments to the terms of its Certificates for Pension Investments (CIPs).
Based on our criteria, we consider this change in the original terms to be a default.
The Ministry of Finance will have to obtain the remaining $47 million to pay, on July 8, the Provisional Investment Certificates and thus avoid falling into default again.
From a statement issued by the Legislature:
The Legislative Assembly approved, with 76 votes, a reform to the Budget Law to reorient $33,064,904.00, for the purpose of providing the necessary resources to urgently meet the payment of obligations generated by the Trusteeship of Social Security Obligations (FOP by its initials in Spanish), money which will be destined for financing the Public Pension System Amortization Fund.
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.
Fitch Ratings has downgraded El Salvador's Long-term (LT) Local Currency Issuer Default Rating (IDR) to 'RD' (Restricted Default) from 'B'/Negative.
From a report by Fitch Ratings:
Fitch Ratings-New York-10 April 2017: Fitch Ratings has downgraded El Salvador's Long-term (LT) Local Currency Issuer Default Rating (IDR) to 'RD' (Restricted Default) from 'B'/Negative.
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 looks like it will be unable to cope with its obligations in the second half of the year, because "there is no money to make it to the end of the year."
Figures from the Salvadoran Foundation for Economic Development (Fusades) indicate that the current balance of government debt (Treasury bills) now exceeds $900 million, and to meet its obligations in the second half of the year $500 million more is needed, which will have also have to be borrowed.
Fusades has cited serious liquidity problems in public finances and stated that "without additional money, the state has only months in which to operate normally".
From a statement issued by the Salvadoran Foundation for Economic and Social Development:
In 2015 there was a slight improvement in economic growth in El Salvador; however, job creation is insufficient and in the first quarter of 2016 a deterioration has been observed.
The manufacturer of flexible packaging and films which has a presence in several countries in the region and in Colombia, has filed for an agreement of suspension of payments in Costa Rica in order to avoid going bankrupt.
An article in Nacion.com reports that the company spokesmen said that the intention "... is to continue operating and to honor all obligations and commitments to customers, creditors and employees.
Standard & Poor's has warned of the risk of default in the next two years and reduced the rating for the sovereign debt of Venezuela, the principal debtor of the Colon Free Zone.
From a statement issued by Standard & Poor's:
OVERVIEW
The Venezuelan government's failure to take timely corrective actions to address growing economic distortions has contributed to economic deterioration and shortages of foreign exchange.
Today Ecuador became the first Latin American economy to be in default, following the global financial crisis that started in September.
The Andean country's risk shot up more than 4,000 points. The government of Rafael Correa says that they have the funds but do not want to pay as yet, since they are investigating "illegalities" in the contract for the debt that expires tomorrow.