Rating Action Commentary
ֳ Upgrades El Salvador to 'B-'; Outlook Stable
Tue 07 Jan, 2025 - 2:34 PM ET
ֳ - New York - 07 Jan 2025: ֳ Ratings has upgraded El Salvador's Long-Term Foreign Currency Issuer Default Rating (IDR) to 'B-' from 'CCC+'. The Rating Outlook is Stable.
A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
Improved Financing Drives Upgrade: The upgrade of El Salvador's rating to 'B-' reflects the reduction in financing needs and easing of financing constraints supported by the regaining of market access, and recently announced IMF program. ֳ expects the program to support implementation of fiscal consolidation measures which in conjunction with the reduction in outstanding short-term debt owed to domestic banks and buyback of external debt, due to last year's liability management operations, should reduce financing needs. Successful consolidation could also boost investor confidence in El Salvador's debt sustainability and enable more issuances.
IMF Deal Reached: On Dec. 18, 2024, the IMF made a staff level agreement with El Salvador for a 40-month Extended Fund Facility (EFF) program for USD1.4 billion. While the details are not yet available, the deal includes a fiscal adjustment, legal changes to make Bitcoin acceptance by businesses voluntary rather than mandatory, and improving governance and transparency. On fiscal policy, authorities agreed to a non-financial public sector (NFPS) primary balance adjustment of 3.5% of GDP over the next three years, with a front-loaded adjustment of 1.5pp in 2025. The EFF should unlock additional multilateral funds. President Nayib Bukele's party commanding majority in congress should facilitate the implementation of these measures.
Authorities Seek Fiscal Consolidation: We estimate the NFPS deficit at 4.7% of GDP in 2024, unchanged from 2023, including our estimate of the pension deficit, which is not included in official data. Revenues grew about 9.0% due to higher taxes tied to consumption and income. Expenditures grew about 14% due to rises in salaries, interest payments, and capital spending. Higher salary expenses included a one-off severance payment to public employees who opted for voluntary early retirement packages. Interest payments are rising due to higher borrowing costs, partly reflecting extension of maturities resulting from previous liability management operations. However, the interest burden is benefitting from a four-year grace period on pension-related debt granted to the government after it completed a debt exchange with private pension funds (AFPs) in May 2023 with interest payments being capitalized. ֳ deemed it a distressed debt exchange.
The 2025 budget targets an overall balance adjustment of 1.9% of GDP via large spending cuts (e.g., general freeze of public sector wages) and expected revenue increases (e.g., better tax administration). It aims to cover all current expenses with fiscal revenues and limits the use of borrowing to capital spending via loans from multilateral lenders. Challenges may arise in rolling out spending cuts and from rising borrowing costs. Diminishing benefits from tax administration measures (e.g., electronic invoicing) could make increases in revenues more challenging. Despite this, we forecast the 2025 deficit to fall to 2.9% of GDP.
Debt Levels Remain High: ֳ estimates that NFPS debt reached 87.7% of GDP in 2024 from 84.9% in 2023. We expect debt-to-GDP to stay about this level in 2025 and fall slowly in 2026, reaching 87.0% by the end of that year. However, similar to past pension debt exchanges, debt-to-GDP could significantly rise in 2027, due to the repayment of accrued interest from the 2023 grace period extension.
Financing Risk Manageable in Short Term: In 2024, El Salvador reduced short-term debt substantially through liability management operations with local banks and improved financing sources. The sovereign accessed external markets by issuing two bonds for deficit financing and debt buybacks, which reduced short-term and medium-term amortizations. However, this resulted in refinancing the existing debt at higher borrowing costs. Multilateral loans were used to support capital spending.
ֳ expects financing needs to be manageable in 2025 and in 2026 following declines in the deficit and short-term amortizations. Deficit reduction will be driven by consolidation efforts at the general government level. Pension-related deficit will likely continue to be 2.0% of GDP and financed via AFPs. IMF disbursements, multilateral funds, and domestic markets should cover the rest of the non-pension related deficits and amortizations. The central government budget does not include any new external bond issuances in 2025. However, we expect repayment capacity to come under greater pressure over the medium term as borrowing costs rise and accrued interest payments (5.7% of GDP) to AFPs come due in 2027.
Growth Rises in 2025: We project real GDP growth will slow to 1.9% in 2024 from 3.5% in 2023. After slow growth in 1H24, economic activity started picking up in 2H24 amid ongoing infrastructural projects and higher tourist arrivals despite a slowdown in private consumption. We expect growth to rise to 2.3% in 2025 and then to slowly return to its low average of 2.0% (2001-2019) in the medium term.
The outlook faces mixed risks. Upside potential exists if the government's efforts to enhance security drive higher investment prospects or stronger-than-expected U.S. growth positively affects remittances and exports. Conversely, the re-election of Donald Trump to the U.S. presidency could lead to stricter immigration policies and a more protectionist U.S. trade stance that affects remittances (mostly coming from the U.S. and equal to 24% of GDP) and exports (a third of which go to the U.S.).
Current Account Deficit Widens: We estimate the current account deficit (CAD) widened to 1.6% of GDP in 2024 from 1.4% in 2023 due to a fall in goods exports amid recovering imports, which offset a rise in services exports and remittances. We forecast the CAD will slowly widen to 1.8% of GDP in 2025 due to the ongoing recovery in imports. Tourist arrivals and remittances will continue buoying current account receipts. The outlook faces downside risks from a stronger dollar on the back of Trump policies, which could add further strain to local exporters.
Net international reserves rose to USD3.7 billion in November 2024 from USD2.8 billion in January 2024. We expect reserves to rise further to USD4.4 billion in 2025 driven by IMF disbursements and higher multilateral financing. ֳ 57% of the reserves is comprised of banking reserve requirements, which are not readily available for government financing. Under the EFF, banks' reserve requirements, currently at 11.5% of deposits, are expected to gradually reach 15% by the end-June 2026. Salvadoran banks have a favorable credit dynamic with year-over-year portfolio growth above 6.0% at 3Q24 and a low level of non-performing loans at 1.8% of gross loans, while maintaining stable profitability, capital and liquidity metrics.
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. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. El Salvador has a medium WBGI ranking at 41%, reflecting a moderate level of regulatory quality, rights for participation in the political process, institutional capacity and control of corruption.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
--Public Finances: Intensification of financing strains that weaken willingness and/or capacity to service government debt, for example due to fiscal deterioration that increases financing needs or deterioration in financing sources.
--External Finances: Significant decline in external liquidity that heightens risks to financial stability and debt repayment capacity.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
--Public Finances: Fiscal consolidation that supports a sustained reduction in government debt-GDP, interest-to-revenue, and financing needs.
--External Finances: Sustained improvement of foreign reserves that ease risks to the financial system and strengthens debt repayment capacity.
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 IDR scale.
ֳ's sovereign rating committee did not adjust the output from the SRM to arrive at the final Long-Term Foreign Currency 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 Long-Term Foreign Currency 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.
Country Ceiling
The Country Ceiling for El Salvador is 'B+', two notches above the Long-Term Foreign-Currency IDR. This reflects strong constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.
ֳ's Country Ceiling Model produced a starting point uplift of +2 notches above the IDR. ֳ's rating committee did not apply a qualitative adjustment to the model result.
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 therefore highly relevant to the rating and a key rating driver with a high weight. As El Salvador has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
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. As El Salvador has a percentile rank below 50 for the respective Governance Indicators, this has a negative impact on the credit profile.
El Salvador has an ESG Relevance Score of '4' for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As El Salvador has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
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. As El Salvador recently implemented a pension debt exchange in 2023 that ֳ deemed a default, this has a negative impact on the credit profile.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. 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, v2.0.2 (1)
- Debt Dynamics Model, v1.3.2 (1)
- Macro-Prudential Indicator Model, v1.5.0 (1)
- Sovereign Rating Model, v3.14.2 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| El Salvador | EU Endorsed, UK Endorsed |