With the exception of Nicaragua, EMBI measures the level of investment risk in the region and El Salvador showed the biggest reduction on Wednesday.
El Salvador showed the largest reduction in the country’s risk in Central Americathis Wednesday after the announcement of aPreliminary agreementwith the International Monetary Fund (IMF).
In the market there are two key variables: the sovereign rating assigned by agencies, such as Moody’s Investors Service, S&P Global Ratings and Fitch Ratings; and the risk that measures the Emerging Bond Indicator (EMBI), developed by J.P. Morgan Chase. The first is a note on the debt issued and the second is basically the certainty that a country has the capacity to pay at the time of issuing new securities.
For El Salvador, theEMBI stood at 7.50 points on August 7A 0.65 point reduction compared to the 8.15 it recorded a day earlier, when the IMF announced the preliminary agreement.
Between the end of March and April 2024, the EMBI of El Salvador was placed in the band of 6 points, but since May it has been above 7 points. On August 5 and 6, he returned to the 8-point range.
From Central America, all countries showed reduction in EMBI, but they were softer.
Guatemala went from a EMBI from 2.37 on August 6 to 2.31 on August 7, a reduction of 0.06 points.
Panama, the region’s first dollar economy since the beginning of the 20th century, has EMBI in 2.69 on August 7, after dropping 0.04 from 2.73 points the day before.
Costa Rica, which before the covid-19 pandemic had a risk profile similar to the Salvadoran economy, is currently the country with the lowest EMBI, at 2.32 points, a reduction of 0.08 points compared to August 6.
Honduras went from 4.43 to 4.40, a reduction of 0.07 points.
What’s the use of EMBI?In addition to measuring government payment certainty, it is used to calculate the minimum rate that an investor would require. The EMBI determined is in addition to the rate of US Treasury bonds. The U.S. considered risk-free. These papers have a quotation of 3.8%, for the time being, if the Salvadoran government decided to go out and issue debt on the capital market it would have to offer a coupon of up to 12 %.
It is still the greatest risky in Central America
Despite the reduction in EMBI,El Salvador maintains the highest risk profile for investments in Central America. However, it seems to move further and further away from the historic 35.12 that it recorded on July 15 in 2022 and when it was placed as the most risky economy in Latin America, with the exception of Venezuela.
At the time, the ratings warned of default on an $800 million bond scheduled for January 2023. Market fears were exaggerated because the government did not advance in an agreement with the IMF and there were tense negotiations after the Fund recommended eliminating bitcoin as a legal tender currency.
The market reacted enthusiastically after the IMF announced a preliminary agreement with the Salvadoran government to correct distortions of public finances and return to debt on a sustainable path, with an improvement in the primary balance of 3.5 points of GDP. While economists warn that signing an aid program is still a long way off, it is a breakthrough after three years since negotiations began in March 2021.
This article has been translated after first appearing in Diario El Mundo