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24 Mar 2011
Outlook revised to stable
New York, March 24, 2011 -- Moody's Investors Service has downgraded the bond rating of the
government of El Salvador to Ba2 from Ba1. The outlook on the bonds
has been revised to stable from negative. In addition, Moody's
has unified El Salvador's foreign and local currency bond and deposit
ceilings at Baa3.
The downgrade reflects the following considerations:
El Salvador compares poorly with many of its Ba-rated peers
in terms of both the size and strength of the economy, as well as
government financial strength.
Following a significant deterioration in 2009, government
financial strength continued to deteriorate in 2010, albeit at a
slowing pace, as a result of the country's continuing fiscal
deficit and sluggish economy. Government debt affordability metrics
-- in particular debt to revenues -- are no longer consistent
with a Ba1 rating in light of the country's limited growth prospects.
The increase in debt leaves El Salvador with less fiscal flexibility
to undertake countercyclical policies in response to economic shocks.
This is of particular concern given the country's inability to utilize
monetary policy, a consequence of the dollarization of its economy.
While the government's fiscal performance in 2010 exceeded
expectations, the government will be challenged to reverse the recent
deterioration of its financial strength in the near-to-medium
term given the extent of the revenue increases and expenditure reductions
If the government is unable to achieve its fiscal consolidation
targets, or economic growth falls below the government's optimistic
forecasts, the resulting increases in debt could jeopardize fiscal
The Ba2 rating incorporates El Salvador's low economic strength
which reflects the small size of the economy, its narrow focus,
modest growth prospects, and the country's low income level.
Additionally, the rating reflects vulnerabilities inherent in El
Salvador's close economic ties with the U.S.,
including its heavy reliance on remittances from the U.S.,
that have been highlighted by the recent recession.
The decline in government financial strength reflects the gradual but
persistent deterioration reported in both fiscal deficits and government
debt indicators during previous years as a result of the recent recession,
which raises concerns about the government's ability to consolidate
its financial position.
While the authorities' willingness and ability to successfully implement
stated policy objectives has historically set El Salvador apart from many
of its neighbors in Central America, Moody's believes that
the government will be challenged to maintain this track record going
The stable outlook considers that while the government's financial
strength is unlikely to experience significant further deterioration in
the near-to-medium term, it is also unlikely to improve
substantially - even under scenarios that contemplate fiscal consolidation
in line with the government's program. That said, the
rating could be downgraded further if government efforts prove insufficient
to reduce the fiscal deficit leading to increased concerns about medium-term
debt sustainability. The rating is unlikely to face upward pressure
in the near-to-medium term.
PREVIOUS RATING ACTION & METHODOLOGY USED
The last rating action on El Salvador was on November 15, 2009 when
the country's bond rating was downgraded to Ba1 from Baa3 and the
outlook was revised to negative.
The principal methodology used in rating of El Salvador was "Moody's
Sovereign Bond Methodology", which was published in September
2008 and can be found on www.moodys.com.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
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Please see the ratings disclosure page on our website www.moodys.com
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used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
MD - Sovereign Risk
Financial Institutions Group
Moody's Investors Service
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
Moody's Investors Service
Moody's downgrades El Salvador to Ba2
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