El Salvador Is Navigating Fiscal Challenges with an Eye on Growth.

A report from Santander Bank details that the rebound of El Salvador’s bonds is defying gravity. According to this report, they continue to rise as a result of the economic measures implemented by the government of President Nayib Bukele.

El Salvador is making headlines in the world of finance with its remarkable fiscal turnaround, defying market expectations and pointing towards potential access to Eurobond markets. The nation’s recent performance in the bond market, coupled with strategic policy measures, underscores its commitment to servicing its debt obligations. While challenges remain, notably a 2% of GDP fiscal deficit and a substantial debt burden, the prospect of broadening access to financing is sparking optimism for a virtuous cycle that could reduce default risk.

In the past fortnight, El Salvador’s bonds have continued their upward trajectory, adding to a year-to-date total return of 91% in the EMUSTRUU index. This impressive performance reflects robust technical support, with investors showing little inclination for profit-taking. Such resilience suggests a potential underweight position by conservative institutional investors, further highlighting the nation’s unique standing in the emerging market landscape.

The recent surge in El Salvador’s financial prospects can be attributed, in part, to a high-profile investment by tech giant Google. While not a game-changer in isolation, this investment signifies the potential for increased foreign direct investment (FDI) and signals a shift towards a high-tech growth model. This aligns with the government’s broader efforts to attract FDI, building on the success of its Bitcoin launch two years ago. While such initiatives may not translate into immediate GDP growth, they serve as a testament to El Salvador’s commitment to honoring its debt and fostering an investor-friendly environment.

Moreover, El Salvador has recently inked an agreement with local banks to extend bond maturities from 1-2 years to an impressive 7 years in debt auctions. These extended tenors not only reduce rollover risks but also provide resilience against potential economic shocks.

At its core, the Bukele administration has consistently demonstrated a market-friendly approach to policy management, reinforcing its commitment to debt repayment following last year’s Eurobond debt buybacks. The administration’s adept handling of the repayment schedule, combined with improved fiscal accounts, has bolstered the nation’s positive momentum. The fiscal deficit has shrunk from a staggering 9.1% of GDP in 2020 to a more manageable 1.8% of GDP in 2022. This virtuous cycle of asset repricing may soon open doors to expanded financing options, although it may not entirely eliminate solvency risks.

In terms of solvency, a breakeven return analysis now forecasts potential default being pushed back to 2029, with bond prices indicating payments through January 2029 at a typical sovereign recovery value of 30. While sizable amortization payments loom in 2025, 2027, and 2029, confidence in these repayment scenarios hinges on fiscal adjustments and broader access to financing, be it from Eurobond markets, the IMF, or a reinvigorated tourism and high-tech sector.

El Salvador’s emergence as an economic success story in the midst of challenges underscores the importance of policy adaptability and investor-friendly initiatives. While uncertainties persist, the nation’s fiscal journey serves as a beacon of hope in the ever-evolving landscape of emerging markets.