New York, July 31, 2019 -- Moody's Investors Service ("Moody's") has assigned a rating of B3 to the
global bond for $1,097 million issued by the Government of
El Salvador, due January 20, 2050.
RATINGS RATIONALE
The B3 rating assigned to the bond is at the same level as the long-term
foreign-currency issuer rating of the Government of El Salvador,
for which the outlook is stable.
El Salvador's B3 rating incorporates the country's low (+) economic
strength, which takes into account El Salvador's relatively weak
growth levels over the past decade, averaging just 2% from
2009 to 2018, with a slight acceleration to around 2.4%
since 2015. It also reflects the country's relatively small economy
($26 billion in 2018) and high dependence on the US for its exports
and remittances. Low growth is partly attributable to El Salvador's
historically low rates of investment and low productivity. Gross
fixed investment averaged 16% of GDP in the 2010-18 period,
compared with the B median of 23%. Despite low growth dynamics,
GDP per capita is in line with that of similarly rated peers ($8,041
vs. the B median of $8,467 PPP in 2018).
El Salvador's credit profile is exposed to climate change risks because
of its small size, relatively low income level and the important
role agriculture plays in the economy. These features, in
addition to the prevalence of climate-related events — on
average two per year over the past decade — can affect growth volatility
and agricultural output, hurting economic strength and exports,
as identified in our report on environmental risks and their impact on
sovereigns.
We assess El Salvador's institutional strength as "Low,"
one notch below the indicative "Low (+)" suggested by
the quantitative metrics used in our scorecard, as inflation metrics
overstate the level of policy credibility and effectiveness in the context
of the country's dollarized economy. Notably, El Salvador's
indicators fare better than the median of its B-rated peers in
all governance indicators except for Rule of Law. Since we do not
consider inflation dynamics a reliable proxy, we incorporate weak
fiscal outcomes, as well as the constraints on the policy process
imposed by political polarization, which, although improving,
remains a hindrance to the predictability of the policymaking process.
We consider El Salvador's fiscal strength "Low (+)."
Our assessment reflects relatively high government debt ratios,
a rising interest burden and persistent fiscal deficits. Fiscal
deficits are driven by rigid government expenditures that were weighed
toward pension outlays, subsidies and public salaries. Persistent
deficits and low economic growth contributed to a continued rise in debt
to 70% of GDP in 2018, above the B-rated median of
58%. At the same time, the affordability of government
debt has decreased, as heightened liquidity risk in 2016-17
contributed to a rise in interest risk premia and to an interest burden
of 15.2% of revenue in 2018, up from 12.8%
in 2010. Although we expect the government to continue to run small
primary surpluses, we estimate that fiscal deficits will hover around
3.0% of GDP in 2019-20 as growing interest payments
on pension debt outweigh some of the fiscal savings provided by the country's
recent pension reform.
El Salvador's susceptibility to event risk is "High (-),"
driven by the subfactor score for domestic political risk. The
passage of pension reform in September 2017 and of government budgets
for 2018 and 2019 indicates a lower likelihood that political impasse
will again prevent legislative agreements to access long-term financing,
as was the case for most of 2016-17. However, political
risk will remain elevated until a track record of improved political relations
among key stakeholders and legislative agreements is further solidified.
Particularly important is evidence of a working relationship between the
incoming administration and the Legislative Assembly, in which the
new president will have a small representation.
We assess government liquidity risk as "Moderate (-),"
in line with its indicative score, to reflect the diminished liquidity
risk following political agreements in the Legislative Assembly.
Short-term debt, Letras del Tesoros Publico (LETES),
has remained stable at around $800 million and even though the
government has not secured funding to retire the LETES, it has not
increased the amount either.
We view banking sector risk as "Low," below the indicative
"Low (+)," given the significant amount of foreign
ownership (90% of total assets). This, combined with
the system's moderate size (70% of GDP) and primarily deposit-based
funding model, reduces the risk of liabilities crystallizing on
the sovereign's balance sheet in the event of a crisis.
We set external vulnerability at "Low (+)," above
the indicative "Low," to account for our expectation
of larger external imbalances as current account deficits widen.
Current account deficits have been trending down since 2013, but
reversed sharply last year as rising energy prices increased the country's
oil imports and strong growth in remittances fueled consumer goods imports.
Although FDI inflows improved in 2017-18, averaging 3.4%
of GDP, FDI flows over the last year have average just half that
amount, leading El Salvador to rely on external debt to cover its
current account deficit. We estimate external debt at 64%
of GDP in 2018, above the B median of 51%.
This credit rating and any associated review or outlook has been assigned
on an anticipated/subsequent basis. Please see the most recent
credit rating announcement posted on the issuer's page on www.moodys.com,
under the research tab, for related economic statistics included
in rating announcements published after June 3, 2013.
This credit rating and any associated review or outlook has been assigned
on an anticipated/subsequent basis. Please see the most recent
credit rating announcement posted on the issuer's page on www.moodys.com,
under the research tab, for related summary rating committee minutes
included in rating announcements published after June 3, 2013.
The principal methodology used in this rating was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Ariane Ortiz-Bollin
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
