Fitch Ratings has upgraded El Salvador’s credit rating by three notches, from CC in their February report to CCC+ in their latest document. The improvement in the rating is largely attributed to the government’s timely payment of the 2023 bond with interests and success in debt repurchases, with Fitch stating that another default event “no longer appears likely.”
“The upgrade of the IDR (Issuer Default Ratings) follows the successful completion of the exchange and payment of significant global bond maturities earlier in the year and reflects Fitch’s opinion that another default event no longer appears likely,” the company emphasized in its latest report.
“The CCC+ rating for El Salvador reflects improved fiscal and external liquidity positions relative to Fitch’s prior expectations,” it added.
In January of this year, the Salvadoran government paid $604 million plus $23 million in interest generated by the debt, as it advanced the maturity date with two repurchase offers made last year, repurchasing $647 million in the 2023 and 2025 securities. The operations generated $288 million in savings for the state coffers. The negotiations with creditors allowed the 2025 maturity debt, initially $800 million, to be reduced to $349 million.
“The risks of external debt service decreased as the government repurchased a considerable portion of its sovereign external bonds due in 2025. The operation reduced the total outstanding amount to $348 million from $800 million,” the report stated.
César Addario, Vice President of Exor Latin America, a financial services firm, stated that this news could mean the start of a process of increasing ratings for the country.
“We at Exor are confident that this will be a positive initial step and that El Salvador will be able to enter into an upward spiral in its rating process with risk rating agencies, as this directly impacts the cost of money for the country as well as access to money in the market,” he emphasized.
Addario had already predicted in February that rating agencies would improve El Salvador’s risk outlook.
“We believe that the agencies will improve the risk outlook for the country, given that after the amortization of the 2023 bond, risk indicators such as the EMBI (Emerging Market Bond Index) began to show favorable results,” he commented to “Diario El Salvador” in another publication.
In addition, the rating agency recognizes the efforts of President Nayib Bukele’s administration to improve tax collection with strategies such as the Anti-Evasion Plan, which has positioned El Salvador as one of the Latin American nations that collects the most taxes relative to its Gross Domestic Product (GDP).
“The government’s fiscal deficit decreased significantly to 2.5% of GDP in 2022, from 5.55% in 2021 and 10.1% in 2020. The ongoing fiscal consolidation has been driven by both solid tax revenue collection and spending restraint. We anticipate that fiscal consolidation will continue this year, as debt exchange has materially decreased pension-related spending,” the rating agency noted.
Finance Minister Alejandro Zelaya recently reported that as of the end of April, tax revenue projections for the Income Tax (ISR) had exceeded estimates made in the 2023 budget by $15.5 million.
It had been projected to receive $221.3 million in ISR by this time, but records show that $236.8 million has been collected, indicating that the target of $2.789 billion in ISR revenue for the year will be exceeded.
Finally, the rating agency anticipates that “public debt as a share of GDP will continue to decline in the coming years due to an improvement in the primary balance…”.