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���������ֳ�-New York-03 May 2017: ���������ֳ� has upgraded El Salvador's Long-Term Local Currency Issuer Default Rating (IDR) to 'CCC' from 'RD' (Restricted Default). The Long-Term Foreign Currency IDR is affirmed at 'CCC'. The issue ratings on El Salvador's senior unsecured Foreign Currency bonds are affirmed to 'CCC'. The Long-Term Local and Foreign Currency IDRs do not have an Outlook. The Country Ceiling is affirmed at 'B-', and the Short-Term Local and Foreign Currency IDRs are affirmed at 'C'.

KEY RATING DRIVERS
The upgrade of El Salvador's Long-Term Local Currency IDR to 'CCC' reflects the following key rating drivers:

On April 28, 2017, the government made interest payments on Certificados de Inversion Previsional (CIPs) debt to the local private pension funds issued under domestic law after obtaining authorization from the Congress the prior week. In line with its criteria, ���������ֳ� therefore judges El Salvador to have cured the default on its sovereign obligations. The default followed a prolonged period of congressional gridlock that severely limited the government's financing options and hindered meaningful fiscal measures to arrest the deterioration of public finances.

The Long-Term FC and LC 'CCC' IDRs reflect that the continued high political polarization could make it difficult for the government to secure approval for additional long-term external borrowing that is needed to bridge the financing needs for 2017-2018, highlighting the continued risks for default. Furthermore, CIPs payments are due in July and October of this year, which will require budget reallocations.

The government issued USD601 million in February only half of its estimated USD1.2 billion financing needs for 2017. The government could continue building the stock of Letes (short-term instruments) during the year, increase arrears and make ad hoc spending adjustments to the budget. However, this does not sustainably reduce risks around meeting the financing needs in a credible manner. A two-thirds majority in congress is needed to secure approval for long-term borrowing, which has been difficult to achieve given strong opposition from the main opposition party, Arena.

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. ���������ֳ� expects El Salvador's continued fiscal deficits and low growth prospects to keep the general government debt, 60.9% of GDP in 2016, on an upward trajectory during 2017-2018. El Salvador's macroeconomic stability underpinned by dollarization and its relatively sound banking system are credit strengths. El Salvador has higher income per capita, social development, and governance indicators than peers.

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 FC IDR scale.

���������ֳ�'s sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term FC IDR by applying its QO, relative to rated peers, as follows:

--Structural: -1 notch to reflect the extreme political polarization with prolonged periods of Congressional deadlock that have led to severe financing constraints and prevented meaningful progress on reforms to arrest the deterioration of public finances.

--Public Finances: -1 notch to reflect El Salvador government's significant reliance on short-term debt to meet its substantial financing needs, and the difficulty of obtaining authorization for external debt issuance. A narrow revenue base and a rigid spending profile makes fiscal consolidation challenging.

���������ֳ�'s SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term 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
The main factors that could, individually or collectively, lead to a negative rating action are:

--Concern about El Salvador's ability to service debt due to hardening financing constraints in domestic or international markets;

--Signs of weakening willingness to service debt due to failure to reallocate budget spending or break the political impasse regarding financing.

Future developments that could, individually or collectively, result in a positive rating action include:

--An easing of political tensions that improves financing flexibility;

--Fiscal adjustment (including a possible IMF agreement) that improves prospects for debt stabilization.

KEY ASSUMPTIONS
--The agency assumes that U.S. economic growth continues to support economic and external forecasts. Furthermore, oil prices rise only gradually to USD52.5 per barrel in 2017 and USD55 per barrel in 2018, helping contain imports, utility subsidies and consumer prices.

--���������ֳ� assumes that monetary policy normalisation in the US proceeds in a gradual and orderly manner.


Contact:

Primary Analyst
Richard Francis
Director
+1-212-908-0858
���������ֳ�, Inc.
33 Whitehall Street
New York, NY 10004

Secondary Analyst
Kelli Bissett-Tom
Associate Director
+1-212-908-0564

Committee Chairperson
Shelly Shetty
Senior Director
+1-212-908-0324

Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com.

Additional information is available on

Applicable Criteria
Country Ceilings (pub. 16 Aug 2016)
Sovereign Rating Criteria (pub. 18 Jul 2016)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy