New York, November 16, 2020 -- Moody's Investors Service, ("Moody's") has
today placed the Government of El Salvador's B3 issuer and senior unsecured
ratings on review for possible downgrade.
The key driver behind the decision is the government's high liquidity
risk due to a large increase in gross financing needs, tight external
financing conditions and limited ability to increase reliance on the domestic
market.
The review period will allow Moody's to assess the administration's
policy response to address financing constraints and to evaluate if the
government's fiscal consolidation plans for 2021 and beyond will
prove effective in assuring debt sustainability.
The long-term foreign-currency bond and deposit ceilings
remain unchanged at B1. The short-term foreign-currency
bond and deposit ceilings remain Not Prime.
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
OF THE RATINGS
RATIONALE FOR INITIATING A REVIEW FOR DOWNGRADE ON EL SALVADOR'S B3 RATINGS
Moody's expects El Salvador's fiscal deficit to reach 11%
of GDP in 2020, exceeding the rating agency's previous estimate
of 8.5% back in May.
In addition to the impact of the coronavirus shock on GDP levels and government
revenue, the widening in the fiscal imbalance reflects the government's
decision to increase spending and provide tax relief measures to assist
households and companies by around 3.5% of GDP amid the
pandemic. The rating agency had expected the government to cut
spending in some areas to accommodate part of the support measures.
However, while the government is still in negotiations with the
Legislative Assembly to approve several multilateral loans, the
government has already implemented a series of spending measures and has
not announced any significant cuts.
Even though Moody's currently expects the fiscal deficit to decline
to 6.3% of GDP in 2021 and the primary deficit to also decline,
the fiscal deficit will remain high, almost double the size of the
deficits El Salvador typically posted pre-pandemic.
Moody's currently estimates the government's gross financing
requirements at 18% of GDP in 2020, up from the 7.9%
of GDP that it estimated in early March. The increase is related
to the sharp deterioration in the primary balance and the rise in interest
payments, the latter of which is largely a result of the government's
heavy reliance on short-term domestic debt. For 2021,
Moody's expects gross financing needs to remain high at 17.3%
of GDP, given higher debt amortizations as a result of the continued
reliance on short-term domestic debt and rising interest burden,
only partly mitigated by a narrower primary deficit.
Financing needs in 2020 are mostly covered, but government spending
could end up higher than what Moody's currently expects, increasing
needs. Moreover, covering all 2020 financing needs is dependent
on the government finalizing negotiations with the Legislative Assembly.
In 2021, El Salvador will need multilateral loans and access to
the external global markets to fill its funding gap. This will
pose credit risks as market conditions for El Salvador have deteriorated
sharply this year with sovereign spreads rising by around 490 basis points
since November 2019 and remaining high at around 869 basis points --
a condition that signals increased investor concerns about tight financing
conditions, the government's policy response and the implications
this could have on debt sustainability.
At the same time, the ability of El Salvador to rely on local funding
has narrowed, as a significant increase in short-term debt
has driven the domestic market's absorption capacity to the limit.
Even though many local banks have been willing to increase their exposure
to short-term debt in the form of Letras del Tesoro (LETES),
these at times have reached a record level of $1.48 billion,
which is also shy of the official limit approved in the budget and substantially
above the $800-$900 million observed in the last
two years.
The review for downgrade period will focus on the extent to which the
authorities can secure financing sources to complete their 2020 funding
program and cover next year's financing needs. The review
will also assess the level of the government's commitment to fiscal
consolidation in 2021 and beyond and how likely efforts are to be effective,
particularly as discussions on the 2021 budget are ongoing within the
Legislative Assembly. The review period will also evaluate El Salvador's
debt sustainability prospects.
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 is significantly exposed to environmental risks because its
geography is dominated by a region known as the Dry Corridor, characterized
by recurrent drought and heavy precipitation events that lead to flooding
and landslides. The steady rise in frequency and severity of drought
and other climate-related shocks pose a threat to the country's
agriculture sector, which employs 21% of the country's population.
As such, weather events can significantly influence El Salvador's
key credit metrics, such as GDP growth volatility, household
incomes and agricultural export earnings.
Social risks also inform El Salvador's credit profile. Although
it has notably declined in the last year, El Salvador's homicide
rate remains one of the highest in the Western Hemisphere and is emblematic
of the country's weak domestic security, a key driver behind significant
out-migration of its residents to the US. While remittances
from foreign nationals support economic activity, 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.
In terms of governance, El Salvador's institutions are weak,
with lack of compliance to their fiscal responsibility law, rule
of law and 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 11 November 2020, 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 fiscal or financial
strength, including its debt profile, has materially decreased.
The issuer has become increasingly susceptible to event risks.
TRIGGERS FOR DOWNGRADE/CONFIRMATION OF THE RATING
Moody's would downgrade the rating if following the review the agency
concluded that El Salvador's government liquidity risks would remain
high and that debt sustainability issues were likely to escalate.
A medium-term policy response that did not support an arresting
of fiscal deterioration over the coming years, leading to a continued
deterioration in debt affordability metrics in particular, would
contribute to this rating outcome. Continued political confrontations
that constrained the government's access to long-term financing,
potentially compromising the refinancing of upcoming debt maturities,
would also negatively affect the rating.
Moody's would confirm the rating if the review were to conclude that a
credible fiscal and economic policy response from the government would
efficiently manage short- and medium-term risks arising
from rising gross financing needs and limited funding sources.
Fiscal restraint that supported debt stabilization would improve the sovereign's
credit quality as well as evidence that El Salvador's medium-term
growth prospects could improve above the current potential of 2%.
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
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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
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_1133569.
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.
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
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
Yves Lemay
MD - Sovereign/Sub Sovereign
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
