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.
The key factor driving the rating upgrade is the significant reduction of the government liquidity risks, as political agreements have led to Congress´approval of long-term government financing and pension reform.
Risk rating firm Moody's announced on Friday, February 23 that El Salvador's debt was rated B3, which represents an improvement from the previous rating of Caa1.However, the country is still considered an issuer with risk of not fulfilling its obligations.
The regulations that take will effect on November 1 allow administrators to create up to four different funds to bring together contributors depending on their age, among other innovations.
Among the changes contemplated in the reform to the Pension Law approved by the Congress is a reduction in the administration fee charged by the AFPs, from 2.2% currently contributed by the employer to 1.9% of the Base Income Quotation.
The reform of the PensionLaw was eventually approved, generating positive reactions from the business sector, which praised the way in which government deputies and the opposition managed to reach an agreement, after months of extreme polarization.
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.
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. Fitch has also downgraded El Salvador's LT Foreign Currency IDR to 'CCC' from 'B'/Negative. El Salvador's senior unsecured foreign currency bonds are downgraded to 'CCC' from 'B'. The LT Local and Foreign Currency IDRs do not have an Outlook. The Country Ceiling is downgraded to 'B-' from 'BB-' and the Short-Term Local and Foreign Currency IDRs are downgraded to 'C' from 'B'.
Allowing up to 30% of pension fund portfolios to invest in foreign securities is one of the changes included in the law reform bill proposed by the private sector.
The Citizens' Initiative for Pensions (ICP) introduced a draft amendment to the Law on Savings System for Pensions and other related laws, such as the pension obligations trust (FOP by its initials in Spanish) to the Assembly.
The union of private companies has filed suit citing unconstitutionality against the law authorizing the state to use the savings of contributors to pay debts.
A law passed by the Legislative Assembly authorizes the State to use the savings of contributors to pay debts, putting at risk the value of future pensions.
The Salvadoran Association of Pension Funds (Asafondos) is opposed to the measure because it involves "... an endless cycle of debt generation, which would grow unchecked over time, without guarantee of payment for workers."
According to Fitch Ratings, pension insurance has become a problem in terms of technical profitability for the companies that sell them.
From a statement issued by Fitch Ratings:
Fitch Ratings - San Salvador - (April 28, 2016):
Pension insurance has become a challenge in terms of technical profitability for sellers, says Fitch Ratings. One of the benefits of the current pension system is protection against disability and pension insurance, contracted by the Pension Fund Administrators (AFP) for its members. This coverage is provided by insurers and covers the insured against accidents or diseases that would make it impossible for them to work. In addition it also covers beneficiaries when the insured person dies, providing the required additional capital to finance pensions.
The issuance of Pension Investment Certificates at a rate of 3% means a charge to future income of contributors in the Salvadoran AFP.
The refusal by the Ministry of Finance to release the documents that justify the decision to pay a fee of 3% on the savings of the AFP entering the 'Fideicomiso de Obligaciones Previsionales' (FOP), was declared illegal by the Institute for Access to Public Information (IAIP), which stated that financial secrecy does not apply to the FOP and the criteria that supported the decision must be revealed.
Days after securitization was mentioned as an option to finance the expansion of the international airport, the government is now saying that it would be better to use pension funds.
Sending signals which only confuse and generate more uncertainty about such an important work as the extension of the main air terminal in the country, the Salvadoran government now says that using pension funds is the best option for financing the expansion.
A request has been made that the interest rate paid by the government for using funds from the Pension Trust Bond rise from 1.3% to 7.5%.
Elsalvador.com reports that "... The leaders of the Committee requested yesterday that a new article specifically state that pension funds earn the passive base interest rate used for investments of 180 days and published by the Central Bank plus 3.5% .. . which ... it considers fair in relation to the payment made by the government to other international investors to lend them money. "
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