S&P Global Upgrades El Salvador’s Credit Ratings to ‘B-/B’

S&P Global Ratings has raised El Salvador’s long- and short-term sovereign credit ratings from ‘CCC+/C’ to ‘B-/B’, with a stable outlook. This positive development follows an assessment of the country’s fiscal and debt management.

The stable outlook suggests a balanced view of risks and opportunities for El Salvador’s financial stability. In a downside scenario, the ratings could be lowered if the government struggles to secure funding for fiscal deficits and rollover needs, or if it fails to make necessary fiscal adjustments to reduce its high debt burden. Higher refinancing risks or signs of reduced debt servicing commitment could also lead to a downgrade.

Conversely, an upside scenario could lead to a further upgrade if comprehensive reforms improve debt management, economic recovery, and fiscal transparency, reducing the financing gap and enhancing debt repayment capacity.

The ratings upgrade is primarily attributed to El Salvador’s proactive approach in refinancing its short-term debt with local banks, which is expected to reduce rollover needs and mitigate default risks in the next two years. This strategy is part of a broader debt reprofiling process initiated about a year ago, which includes external debt repurchases and a pension debt exchange.

While these measures provide fiscal relief, El Salvador still faces fiscal and debt challenges due to high debt service payments and limited financing options. The short-term debt refinancing targets around 8% of the GDP in short-term bills (LETES and CETES). The government will repay short-term bills at their maturity and issue new debt with longer maturities, offering higher interest rates to compensate.

This program began in October and is expected to be completed by September 2024, reducing rollover needs on short-term debt. It also aims to gradually decrease the stock of short-term debt. However, El Salvador’s public finances remain fragile due to institutional weaknesses, low per capita GDP, modest growth prospects, a high debt burden, and a lack of monetary flexibility due to full dollarization.

The government’s discussions with the IMF hold potential for financial stability, though a formal program is expected after the presidential election in February 2024. El Salvador’s path forward involves addressing fiscal and debt challenges while embracing economic reforms for a more stable future.