New York, July 30, 2021 -- Moody's Investors Service ("Moody's") has today
downgraded the Government of El Salvador's long-term foreign-currency
issuer and senior unsecured ratings to Caa1 from B3. The outlook
remains negative.
The key drivers the downgrade were:
1) Market access for the sovereign is likely to remain constrained ahead
of a challenging debt amortization schedule beginning in 2023.
2) A deterioration in the quality of policymaking that has intensified
implementation risks to the authorities' fiscal adjustment plans
and increased uncertainty about financing prospects.
The negative outlook on the Caa1 rating reflects Moody's view that
the fiscal position remains vulnerable and susceptible to financing shocks
that could jeopardize the sovereign's repayment capacity ahead of
the challenging redemption schedule on its external market debt beginning
in January 2023. Limited availability of funding alternatives for
the sovereign and uncertainty surrounding the possibility of fresh financing
from the International Monetary Fund (IMF) suggest that the sovereign
will continue to face liquidity pressures in future years despite the
authorities' willingness to enact measures to achieve further,
gradual fiscal consolidation.
Concurrently, Moody's also lowered El Salvador's foreign-currency
country ceiling to B2 from B1 maintaining the existing two-notch
gap between the sovereign rating and the foreign-currency ceiling
to reflect the deteriorating predictability of institutions and government
policies, weak policy effectiveness and the government's relatively
large share in the country's total external debt. Moody's does
not assign a local currency country ceiling for El Salvador because the
country is fully dollarized.
RATINGS RATIONALE
RATIONALE FOR THE DOWNGRADE OF THE RATINGS TO Caa1
FIRST DRIVER: MARKET ACCESS FOR THE SOVEREIGN IS LIKELY TO REMAIN
CONSTRAINED AHEAD OF A CHALLENGING DEBT AMORTIZATION SCHEDULE BEGINNING
IN 2023
A persistently high cost of market funding and the need to access markets
to rollover maturing debt highlight risks to repayment capacity ahead
of a series of external bond amortizations beginning in January 2023,
given already low debt affordability metrics. High yields on the
sovereign's outstanding debt issuances, illustrated by an EMBIG
sovereign spread of 805 as of 28 July 2021, and a reliance on short-term
domestic sources of financing have been partly responsible for the sovereign's
tight liquidity position as there has not yet been a formal agreement
on an International Monetary Fund (IMF) program to alleviate funding constraints,
and to lend credibility and anchor market confidence such that the maturing
market debt can be rolled over at sustainable rates.
Although Moody's has incorporated the potential funding flows from
a possible IMF program in its analysis of El Salvador's funding
prospects for 2022, the rating agency believes that even if an agreement
is reached with the IMF on a financing program, issues involving
the sovereign's high cost of funding are unlikely to be fully addressed
by official funding flows. Elevated interest expenditures on debt
service will continue to weigh on fiscal performance, constraining
the sovereign's liquidity position ahead of a challenging amortization
schedule. Moody's estimates indicate that the ratio of interest
payment-to-government revenue was 17.8% in
2020 well above the 8.4% median for B-rated sovereigns
and higher than the 13.3% median for Caa-rated sovereigns.
Moreover, its projections indicate that the interest burden is likely
remain above peer medians through at least 2024.
SECOND DRIVER: A DETERIORATION IN THE QUALITY OF POLICYMAKING THAT
HAS INTENSIFIED IMPLEMENTATION RISKS TO THE AUTHORITIES' FISCAL
ADJUSTMENT PLANS AND INCREASED UNCERTAINTY ABOUT FINANCING PROSPECTS
The sovereign's liquidity situation for 2021 has improved as a result
of a 26.3% increase in central government revenues in January-May
2021 relative to the same period in 2020, reflecting a strong economic
rebound supported by a 45.3% growth in remittance inflows
in January-June 2021 versus the same period last year. Moody's
forecasts that economic growth will be in the order of 4.5%
in 2021, with upside risks from continued high remittance inflows
that would support domestic demand, following a contraction of 7.9%
in 2020. Despite these improved conditions, a series of policy
decisions have undermined governance and institutional strength,
delaying negotiations with the IMF, generating uncertainty and adding
further challenges to debt sustainability and market access.
On 4 June, the government withdrew from the International Commission
against Impunity in El Salvador after the Organization of American States,
which established the commission to fight corruption, appointed
a member of the political opposition as an advisor. Before that,
on 1 May, the newly sworn-in Legislative Assembly,
where President Nayib Bukele's party Nuevas Ideas holds a supermajority
(56 of 84 total seats), voted to remove and replace five Supreme
Court justices. More controversially, on 9 June the Legislative
Assembly approved the world's first law to make Bitcoin (a cryptocurrency)
legal tender in the country, such that both the US dollar and Bitcoin
are now legal currency for settling transactions.
In Moody's opinion, these measures reflect weakened governance
in El Salvador, raising tensions with international partners --
including the United States (Aaa stable) -- and jeopardizing
progress toward an agreement with the IMF. In this context,
risks associated to El Salvador's need to access sufficient external
financing ahead of bond redemptions beginning in January 2023 have materially
increased.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook reflects Moody's view that risks to El Salvador's
credit profile are skewed to the downside. This is based on Moody's
opinion that the fiscal position remains vulnerable and susceptible to
financing shocks that could jeopardize the sovereign's repayment
capacity ahead of the challenging redemption schedule on its external
market debt beginning in January 2023, particularly if market access
remains constrained.
Although the authorities are likely to continue enacting measures to achieve
further, gradual fiscal consolidation, public debt ratios
remain elevated at 89.2% of GDP as of the end-2020.
Given large financing needs, which Moody's estimates will
be in excess of 15% of GDP in 2022, and upcoming debt redemptions
in subsequent years, identifying sources of financing against a
backdrop of tight liquidity will be a key credit challenge. Even
if an agreement with the IMF unlocks fresh multilateral financing,
implementation risks and policy missteps could undermine market sentiment,
potentially increasing risks to bondholders.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
El Salvador's ESG Credit Impact Score is highly negative (CIS-4),
reflecting moderate exposure to environmental risk, highly negative
exposure to social risks and a very highly negative governance issuer
profile score (IPS) with limited financial resilience.
El Salvador's exposure to environmental risks is moderately negative
(E-3 IPS), related to physical climate change and limited
natural capital. El Salvador's geography is dominated by
a region known as the Dry Corridor, characterized by heavy precipitation
events that lead to flooding and landslides and occasional droughts.
The steady rise in the frequency and severity of droughts and other climate-related
shocks poses a threat to the country's agriculture sector, which
employs 16% of the country's population. Extreme weather
events can influence El Salvador's key credit metrics, such as GDP
growth volatility, household incomes and agricultural export earnings.
Exposure to social risks is highly negative (S-4 IPS). Despite
a recent decline, El Salvador's homicide rate remains among the
highest in the Western Hemisphere. 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.
The influence of governance on El Salvador's credit profile is very
highly negative (G-5 IPS) reflecting its weak government effectiveness,
rule of law and control of corruption. A deteriorating predictability
of institutions and government policies also undermines the governance
issuer profile score.
GDP per capita (PPP basis, US$): 8,422 (2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -8.5% (2020
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.5%
(2020 Actual)
Gen. Gov. Financial Balance/GDP: -8.8%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 0.5% (2020 Actual) (also
known as External Balance)
External debt/GDP: 74.% (2020 Actual)
Economic resiliency: b1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 28 July 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's institutions and governance
strength, have materially decreased. Other views raised included:
The issuer's economic fundamentals, including its economic strength,
have not materially changed. The issuer's fiscal or financial strength,
including its debt profile, has materially decreased. The
issuer's susceptibility to event risks has not materially changed.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATINGS UP
Steady progress on consolidating central government finances that substantially
reduces financing needs and improves market access at materially lower
funding rates, or multilateral funding in amounts large enough to
fully cover government financing needs in 2021-23, including
upcoming external market debt redemptions, could lead to an upgrade
of the sovereign's rating.
WHAT COULD CHANGE THE RATINGS DOWN
Downward pressure on the sovereign's credit profile would emerge if the
sovereign is unable to secure multilateral financing, including
from the IMF, large enough to materially ease liquidity pressures.
The persistence of funding costs at a level that compromises debt sustainability
would put additional downward pressure on El Salvador's credit profile
increasing the risk of losses to bondholders.
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
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
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and whose ratings may change as a result of this credit rating action,
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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.
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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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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
office that issued the credit rating is available on www.moodys.com.
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.
Jaime Reusche
VP - Senior Credit Officer
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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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
