Rating Action Commentary
ֳ Affirms El Salvador 'B-' IDR; Outlook Revised to Negative
Thu 30 Apr, 2020 - 6:10 PM ET
ֳ - New York - 30 Apr 2020: ֳ, New York, April 30, 2020: ֳ has affirmed El Salvador's Long-Term Foreign- Currency Issuer Default Rating (IDR) at 'B-' and revises the Outlook to Negative from Stable.
ֳ affirmed El Salvador's Long-Term Local Currency rating at 'B-', revised the Outlook to Negative from Stable and withdrew the rating. The Short-Term Local Currency 'B' rating was affirmed and subsequently withdrew the rating.
Rating Withdrawals
The ratings were withdrawn due to a criteria change. The new criteria states that for fully dollarized economies like El Salvador, ֳ would treat default on their dollarized debt as a default on the sovereign's FC IDR.
Key Rating Drivers
The Negative Rating Outlook reflects deterioration in debt sustainability metrics as a result of the widening of the fiscal deficit and economic contraction as well as financing constraints stemming from increased reliance on short-term debt, limited scope for additional local market financing and uncertain access to external market financing given high borrowing costs. However, multilateral funding can help ease borrowing constraints this year.
We project a deep economic contraction of 4.8% in 2020 due to the extended national quarantine to combat the coronavirus pandemic as well as 20% fall expected in remittances, representing nearly 20% of GDP,that will hit domestic demand sharply. However, we expect a strong rebound of 5% in 2021 but risks are to the downside in both 2020-2021.
The expected 15% fall in tax revenues due to the economic downturn and spending efforts totaling USD1 billion (around 3.5% of GDP) to combat the pandemic will lead to sharp deterioration in the fiscal position in 2020, which ֳ projects at 10.5% of GDP, up from 3.1% of GDP in 2019.
As a result, debt sustainability metrics are expected to deteriorate with government debt to GDP projected at 85% of GDP in 2020, which is significantly higher than the current 'B' median. Interest to revenues is high as well, approaching 20%. Both metrics are rising rapidly with debt to GDP expected to reach 90% by 2022. However, almost 25% of the total public debt is related to pensions with low fixed rates.
ֳ estimates total financing needs of USD3.1 billion (12% of GDP) in 2020, including the central government deficit and USD383 million in debt amortizations, excluding nearly USD2 billion in short-term 'Letes' and 'Cetes' T-bills as well as arrears. El Salvador faces a financing gap of USD1.4 billion in 2020 given USD389 million received from the IMF and an additional nearly USD1.3 billion obtained in the local market, mostly in short-term debt and local pension-related debt CIPs. Much of the gap will likely be filled through multilateral disbursements.
Financing options in the local market are limited given that the government has nearly approached the legal upper limit of USD1.5 billion in short-term Letes debt with nearly USD500 million added year to date. The government has also issued almost USD500 million in one-year Cetes in the local market. Rates on Letes and Cetes issuance in April 2020 were 9.5%, over 250 basis points higher than March issuances. The local private pension funds and banks have limited appetite for buying further issuances given the fall in domestic liquidity and expected credit deterioration. The large stock of short-term debt will also complicate the government's debt service capacity as well, increasing roll-over risks.
Despite the challenges, ֳ expects the sovereign will be able to meet near-term debt service payments. The government faces only USD383 million in debt amortizations in 2020. However, interest payments are more onerous with total USD1.0 billion due in 2020 (over 20% of government revenues). If financing is not secured, the government could face difficult budget cuts and build-up of arrears.
Furthermore, ֳ estimates El Salvador's 2021 fiscal deficit at 7.2% of GDP given the expected increase in the interest burden, fall in income taxes and difficulty of obtaining a faster consolidation ahead of the 2021 legislative elections. Financing needs will remain high at around USD2.5billion in 2021, not including short-term debts. The 2021 elections could also complicate authorization to secure financing (a two-thirds majority in the Legislative Assembly is needed to authorize new debt issuance).
External pressures mainly stem from the capital account as ֳ estimates that the current account deficit will fall to 1.9% of GDP in 2020 from 2.3% in 2019 given an expected sharp fall in imports due to the economic contraction and fall in oil prices despite an anticipated in remittances. Net external debt is expected to rise to nearly 80% of current account payments in 2020 from 52% in 2019.
El Salvador's ratings are supported by higher human development and governance indicators compared to peers and history of relative macroeconomic and financial stability anchored by official dollarization while high government debt, recent history of default on local pension related debt and low growth potential constrain its ratings.
ESG - Governance: El Salvador has an ESG Relevance Score (RS) of 5 for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) has in our proprietary Sovereign Rating Model. El Salvador has a medium WBGI percentile ranking of 36.9%, reflecting a recent track record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
ֳ's proprietary SRM assigns El Salvador a score equivalent to a rating of 'B-' on the Long-Term Foreign-Currency (LT FC) IDR scale.
ֳ's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR.
ֳ's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centered averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. ֳ's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade: --A sharp increase in financing constraints, such as the inability to acquire adequate financing from multilaterals or other sources of funding. Political gridlock that affects future access to financing would also be a negative factor. --Deterioration in the outlook for fiscal consolidation or growth prospects that negatively affect debt sustainability. Factors that could, individually or collectively, lead to positive rating action/upgrade: --An easing of financing constraints. --A post-coronavirus fiscal adjustment consistent with improvement in public debt sustainability.
Best/Worst Case Rating Scenario
International scale credit ratings of Public Finance issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit /site/re/10111579.
Key Assumptions
ֳ expects U.S. growth and employment to track its April 2020 Global Economic Outlook (GEO).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
El Salvador has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in ֳ's SRM and are highly relevant to the rating and a key rating driver with a high weight.
El Salvador has an ESG Relevance Score of '5' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in ֳ's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.
El Salvador has an ESG Relevance Score of '4' for Human Rights and Political Freedoms as strong social stability and voice and accountability are reflected in the World Bank Governance Indicators that have the highest weight in the SRM. They are relevant to the rating and a rating driver.
El Salvador has an ESG Relevance Score of '4' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for El Salvador, as for all sovereigns.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on ֳ's ESG Relevance Scores, visit .
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
Applicable Criteria
Applicable Models
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Country Ceiling Model, v1.7.1 (1)
- Debt Dynamics Model, v1.2.0 (1)
- Macro-Prudential Indicator Model, v1.4.0 (1)
- Sovereign Rating Model, v3.12.0 (1)
Additional Disclosures
Endorsement Status
| El Salvador | EU Endorsed |