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Investing.com -- On Tuesday, Fitch Ratings announced the affirmation of El Salvador’s Long-Term Foreign Currency Issuer Default Rating (IDR) at ’B-’ with a stable outlook. The decision reflects a combination of factors including a reduction in financing needs and easing of financing constraints, supported by the country’s engagement with an International Monetary Fund (IMF) program.
El Salvador’s rating benefits from a decline in financing requirements and the implementation of policy anchors under an IMF program. The nation has seen lower inflation and a higher GDP per capita compared to its peers. However, the rating is constrained by moderate economic growth, high debt levels, and interest burdens. The 2023 pension-related debt exchange was considered a distressed debt exchange by Fitch.
The IMF’s Extended Fund Facility (EFF) for El Salvador, amounting to $1.4 billion over 40 months, is structured to provide backloaded funding with frontloaded reforms. These reforms aim to improve fiscal discipline and governance, including an actuarial evaluation of the pension system that will lead to a reform proposal for its sustainability. The program also addresses Bitcoin-related risks by ensuring its voluntary acceptance in the private sector while preventing its use by the public sector and in tax collections. The popularity of President Nayib Bukele and his party’s majority in congress are seen as mitigating factors for the implementation risks of the program, which is expected to help attract an additional $2.2 billion from other multilateral institutions.
Fitch noted an improving fiscal trajectory for El Salvador, with the non-financial public sector deficit decreasing from 4.7% of GDP in 2023 to 4.4% in 2024, and it is projected to fall further to 3.4% in 2025 and 2.1% in 2026. The 2025 budget includes structural reforms aimed at reducing expenditures and enhancing revenues through more efficient tax administration.
Despite these improvements, public sector debt is anticipated to remain high, reaching 87.8% of GDP in 2025, significantly above the ’B’ median of 52.1%. The high interest to revenue burden, which stood at 17.2% in 2024, continues to be a key constraint on the rating.
El Salvador’s financing needs are expected to be manageable in the coming years, with multilateral loans projected to cover the government’s requirements, and no new external bond issuances planned for 2025 and 2026. The country also managed to reduce its short-term debt in 2024 through liability management operations and accessing external markets.
Economic growth is forecasted to slow to around 2.2% in 2025 due to fiscal adjustments and a slowdown in U.S. growth, but it is expected to pick up to 2.5% in 2026 and 2027. Private investment is likely to increase as the government repays debts to local banks, which is expected to stimulate economic activity and support growth prospects.
The current account deficit, which widened to 1.8% of GDP in 2024, is projected to narrow in the following years, supported by remittances and tourism. FDI is expected to fully finance the deficit, focusing on infrastructure and industrial development. Risks to El Salvador’s external finances include U.S. tariffs and immigration policies, which could impact exports and remittance inflows.
Lastly, El Salvador’s international reserves are anticipated to increase to $4.2 billion in 2025, with the Central Bank raising liquidity requirements to strengthen financial stability. The country’s ESG Relevance Score for governance factors remains at ’5’, reflecting a moderate level of regulatory quality and control of corruption.
Fitch outlined potential factors for a negative rating action, including intensified financing strains or a significant decline in external liquidity. Conversely, a positive rating action could result from fiscal consolidation leading to a sustained reduction in government debt-to-GDP and improvements in foreign reserves.
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