New York, February 05, 2021 -- Moody's Investors Service, ("Moody's") has
today confirmed the Government of El Salvador's long-term
issuer and senior unsecured ratings at B3. Moody's also changed
the outlook to negative. This concludes the review for downgrade
that was initiated on 16 November 2020.
While financing conditions will remain very tight in both the domestic
and external markets this year and next, Moody's expects the
government to begin consolidating its finances in the second half of this
year, which would catalyze access to multilateral debt financing
to cover most of its funding needs this year, lowering the likelihood
of a credit event in the next two years.
The negative outlook captures the credit risks associated with implementation
risks of their forthcoming fiscal adjustment efforts, high liquidity
risks driven by large gross financing needs in 2021-23 and persistent
debt sustainability concerns despite an expected fiscal adjustment.
Even though Moody's believes the government will begin consolidating
its finances this year and through 2022, debt is unlikely to stabilize,
surpassing 90% of GDP, and market access will be needed in
2022 as an $800 million bond matures in January 2023.
The foreign-currency (FC) country ceiling remains unchanged at
B1, maintaining the existing gap between the sovereign rating and
the FC ceiling. The two-notch gap reflects the deteriorating
predictability of institutions and government actions, weak policy
effectiveness and the relatively large share of the country's external
debt being government debt.
Moody's does not assign local currency (LC) country ceilings for
El Salvador because the country is fully dollarized. However,
Moody's uses the considerations for the LC ceiling to assign the
FC ceiling.
RATINGS RATIONALE
RATIONALE FOR CONFIRMING EL SALVADOR'S B3 RATINGS
Based on the current administration's track record in fiscal management
and the size of the adjustment required, Moody's believes
it will be unlikely for the government to implement the kind of revenue
and expenditure measures needed to stabilize the debt metrics by 2023.
However, Moody's considers the government will begin fiscal
consolidation efforts this year, narrowing the fiscal deficit over
a two-year period to at least 6.5% of GDP in 2022
from 9.6% of GDP in 2020. The government's
stated commitment to begin consolidating its finances would catalyze multilateral
financing in amounts sufficient to cover El Salvador's funding needs
this year and contribute to reduce debt sustainability concerns.
Moody's thinks a combined fiscal adjustment of at least 3 percentage
points of GDP would also facilitate access to global markets in 2022,
which would be crucial as an $800 million global bond is due on
24 January 2023.
On 24 December, El Salvador's legislative assembly approved
the 2021 budget, lowering the budget for several ministries but
also incorporating important spending increases in education, health
and defense, amounting to 2.9% of GDP. While
the approved budget initially entailed an 8.8% of GDP deficit,
Moody's forecasts the deficit will decline to 7.5%
of GDP in 2021, above the government' expectation for the
year, which is 6.5% of GDP. Still, a
fiscal deficit between 6.5% and 7.5% of GDP
in 2021 will remain high and more than double the size of the deficit
El Salvador posted between 2015-19 (3% of GDP).
To cover financing needs in 2021, which Moody's estimates
at 16.6% of GDP, the government has indicated its
intention to rollover most of the short-term domestic debt and
contract multilateral debt. The government has identified $1.68
billion (6.4% of GDP) in potential additional multilateral
financing which, in addition to $498 million (1.9%
of GDP) that the government has already contracted for the year,
would leave the government's funding gap at $140 million
(0.5% of GDP) for this year, according to Moody's
estimates, a relatively modest amount that the rating agency considers
the government should be able to fund.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook captures the credit risks associated with implementation
risks of the authorities' fiscal adjustment efforts, liquidity
risks derived from El Salvador's large gross financing needs in
2021-23, and persistent debt sustainability concerns despite
an expected fiscal adjustment.
In addition to political willingness to begin consolidating its finances,
political support from the legislative assembly will also be required
for the government to carry out a fiscal adjustment, particularly
for efforts that involve changes to the government's revenue and
expenditure structures.
Liquidity risks will remain high in 2022 and 2023 as Moody's expects
gross financing needs to remain between 16%-18% of
GDP, even after the rating agency forecasts a narrower primary deficit
of 1.5% of GDP in both years from 2.6% of
GDP in 2021, given continued reliance on short-term debt
and an interest burden of 5% of GDP. Short-term domestic
debt will represent 50% of the funding sources the government has
identified to cover this years' funding gap.
The conditions at which El Salvador can access global markets have deteriorated
sharply with sovereign spreads at around 700 basis points in January 2021,
rising by around 300 basis points from last year. High spreads
reflect increased investor concerns about tight financing conditions,
the government's policy response and the implications this could have
on debt sustainability.
In addition, El Salvador's ability to rely on local funding
has narrowed as a significant increase in short-term debt has driven
the domestic market's absorption capacity to its limit. Even though
local banks may be willing to increase their exposure to short-term
debt, in the form of Letras del Tesoro (LETES) or Certificados del
Tesoro (CETES), Moody's thinks they will not be able to materially
increase their holdings by much more. Local banks would need approval
from their parent companies to further increase their exposure to government
debt and LETES have already reached a record level of $1.41
billion, shy of the official limit approved in the 2021 budget,
and substantially above the $800-$900 million observed
pre-pandemic.
Debt sustainability concerns persist even though Moody's believes
the government will begin consolidating its finances this year and through
2022. Given the higher interest burden, not even a larger-than-expected
fiscal adjustment and a return to a primary surplus of 1% of GDP
(registered between 2017-19) would be sufficient to stabilize the
debt metric, which Moody's estimates will surpass 90%
of GDP in 2022. Market access will be needed next year as an $800
million bond matures in January 2023. Improving the government's
debt structure to reduce liquidity risks and improve debt affordability
requires legislative support, since a two-third majority
in the legislative assembly is needed to issue long-term debt in
order to retire existing short-term debt.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Moody's takes account of the impact of environmental (E), social
(S) and governance (G) factors when assessing sovereign issuers' economic,
institutional and fiscal strength and their susceptibility to event risk.
In the case of El Salvador, the materiality of ESG to the credit
profile is as follows: El Salvador's ESG Credit Impact Score
is highly negative (CIS-4), reflecting high exposure to environmental
risk, and a moderately negative governance issuer profile score
with limited financial resilience.
El Salvador's exposure to environmental risks is highly negative
(E-4 issuer profile score), related to physical climate change
and limited natural capital. The rise in the frequency and severity
of tropical storms and other climate-related shocks poses a threat
to the country's agriculture sector, which employs 21% of
the country's population. Extreme weather events can significantly
influence El Salvador's key credit metrics, such as GDP growth volatility,
household incomes and agricultural export earnings.
Exposure to social risks is also highly negative (S-4 issuer profile
score). Although it has notably declined since 2019, El Salvador's
homicide rate has historically been high. While remittances from
El Salvadorans living abroad support about 20% of economic activity,
which boosts consumption, high levels of violence and insecurity
stunt the country's investment levels, productivity and long-term
growth potential. Moody's also regards the coronavirus outbreak
as a social risk under its ESG framework, given the substantial
implications for public health and safety.
The influence of governance on El Salvador's credit profile is highly
negative (G-4 issuer profile score) reflecting its weak government
effectiveness, rule of law, security challenges and a history
of political confrontation between the executive and legislative branches
that frequently prevent progress on needed reforms to address economic
and fiscal challenges.
GDP per capita (PPP basis, US$): 9,147 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.4% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0% (2019
Actual)
Gen. Gov. Financial Balance/GDP: -3.1%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.1% (2019 Actual)
(also known as External Balance)
External debt/GDP: 64.4% (2019 Actual)
Economic resiliency: b1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 3 February 2021, a rating committee was called to discuss the
rating of the El Salvador, Government of. The main points
raised during the discussion were: The issuer has become increasingly
susceptible to event risks. Other views raised included:
The issuer's economic fundamentals, including its economic strength,
have not materially changed. The issuer's institutions and governance
strength, have not materially changed. The issuer's fiscal
or financial strength, including its debt profile, has materially
decreased.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
While upward pressure on the B3 rating is unlikely at this time given
the negative outlook, a material reduction in debt sustainability
concerns and government liquidity risks would be supportive to the credit
profile and could lead to a return to stable outlook. A fiscal
adjustment beginning this year that materially reduces the fiscal deficit
and gradually returns it to pre-pandemic levels would support the
return to stable. A reduction in government liquidity risks could
stem from a credible fiscal and economic policy response that would efficiently
manage short- and medium-term risks arising from rising
gross financing needs and limited funding sources. In particular,
an improvement in the debt structure, reducing the heavy reliance
on expensive short-term debt, would also be positive to the
credit.
Downward pressure on El Salvador's B3 ratings would emerge if Moody's
no longer expected material fiscal adjustment to be forthcoming this year
and if the rating agency had concerns related to the government's
ability to access multilateral financing. Such a change in Moody's
view would occur if the authorities were unwilling or unable to implement
a fiscal adjustment of at least 3 percentage points of GDP by 2022,
narrowing the fiscal deficit to around 6.5% of GDP in 2022
from 9.6% of GDP in 2020, or if financing conditions
in domestic and external markets became even more stringent than what
Moody's assumes in its baseline. Further escalation of financial
stress related to LETES would raise the credit risks related to the government's
long-term debt. Political confrontations between the executive
and the legislative branches that constrained the government's access
to long-term financing, potentially compromising the refinancing
of upcoming debt maturities, would also negatively affect the rating.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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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
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For any affected securities or rated entities receiving direct credit
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Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
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These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
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The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
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for additional regulatory disclosures for each credit rating.
Ariane Ortiz-Bollin
Vice President - Senior 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
Alejandro Olivo
MD - Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
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U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
