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Rating Action:

Moody's places El Salvador's B3 ratings on review for downgrade

16 Nov 2020

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

No Related Data.
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