Fitch upgrades El Salvador's rating to 'B-'; stable outlook

Fitch Ratings has upgraded El Salvador’s long-term foreign currency issuer credit rating (IDR) to ‘B-‘ from ‘CCC+’. The rating outlook is Stable.

The upgrade of El Salvador’s rating to ‘B-‘ reflects the reduction in financing needs and the easing of financial constraints supported by the recovery of market access and the recently announced IMF program. Fitch expects the program to support the implementation of fiscal consolidation measures that, together with the reduction of outstanding short-term debt with domestic banks and the repurchase 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 allow for further issuance.

On December 18, 2024, the IMF reached a staff-level agreement with El Salvador for a 40-month USD 1.4 billion Extended Fund Facility (EFF) program. While details are not yet available, the agreement includes a fiscal adjustment, legal changes to make Bitcoin acceptance by companies voluntary rather than mandatory, and improving governance and transparency. On fiscal policy, the authorities agreed to an adjustment of the primary balance of the non-financial public sector (NFPS) of 3.5% of GDP over the next three years, with an initial adjustment of 1.5 pp in 2025. The FAP should unlock additional multilateral funds. The majority of President Nayib Bukele’s party in Congress should facilitate the implementation of these measures.

The 2025 budget targets a balance sheet adjustment of 1.9% of GDP through large spending cuts (e.g., general public sector wage freeze) and planned revenue increases (e.g., improved tax administration). It aims to cover all current expenditures with tax revenues and limits the use of borrowing for capital expenditures through loans from multilateral lenders. Challenges may arise in implementing spending cuts and due to increased borrowing costs. Declining benefits from tax administration measures (e.g., electronic invoicing) could hinder revenue growth. Despite this, we forecast the 2025 deficit to fall to 2.9% of GDP.

Notably, Fitch estimates that non-financial public sector debt reached 87.7% of GDP in 2024, up from 84.9% in 2023. We expect the debt-to-GDP ratio to remain at this level in 2025 and decline slowly in 2026, reaching 87.0% by the end of that year. However, similar to previous pension debt swaps, the debt-to-GDP ratio could increase significantly in 2027, due to the repayment of accrued interest from the 2023 grace period extension.

Fitch expects financing needs to be manageable in 2025 and 2026 following deficit reduction and short-term amortizations. Deficit reduction will be driven by consolidation efforts at the general government level. The pension-related deficit will likely remain at 2.0% of GDP and will be financed through the PFAs. Disbursements from the IMF, multilateral funds and domestic markets should cover the remaining non-pension deficits and amortizations. The central government budget does not include any new external bond issuance in 2025. However, we expect payment capacity to come under increased pressure in the medium term as borrowing costs increase and accrued interest payments (5.7% of GDP) to the PFAs fall due in 2027.

The outlook faces mixed risks. There is upside potential if the government’s efforts to improve security drive higher investment prospects or if stronger-than-expected U.S. growth positively affects remittances and exports. Conversely, the re-election of Donald Trump as U.S. president could lead to tighter immigration policies and a more protectionist U.S. trade stance that affects remittances (which mostly come from the U.S. and equal 24% of GDP) and exports (one-third of which go to the U.S.).

Net international reserves increased to USD3.7 billion in November 2024 from USD2.8 billion in January 2024. We expect reserves to increase further to USD4.4 billion in 2025 driven by IMF disbursements and increased multilateral financing. About 57% of reserves are made up of bank reserve requirements, which are not readily available for government financing. Under the SAF, bank reserve requirements, currently at 11.5% of deposits, are expected to gradually reach 15% by end-June 2026. Salvadoran banks have favorable credit dynamics with year-on-year portfolio growth above 6.0% as of 3Q24 and a low level of bad loans at 1.8% of gross loans, while maintaining stable profitability, capital and liquidity metrics.

Source: Forbes Centroamerica