The agency believes that a program would improve El Salvador’s credit profile, but it may be complicated due to the deterioration of these indicators in recent years.
Fitch Ratings warned that the signing of a program between the International Monetary Fund (IMF) and the Salvadoran government faces obstacles – because of concerns about bitcoin risk and fiscal deterioration.
On 6 August, the IMF announced that it had reached a preliminary agreement with the Nayib Bukele Administration for a programme that provides for aTax adjustment of 3.5 %gross domestic product (GDP) for three years.
Although Fitch believes that a program is now – more likely, there are still important obstacles to securing financing with the IMF. The prospects for a programme remain unclear, in part because of IMF concerns about the risks to financial stability that could result from the adoption of bitcoin as a legal tender currency in 2021, he said in an analysis published on 23 August.
Fitch recalls that the rating allocated for El Salvador, in “CCC,” is limited by the persistent fiscal deficit and limited financing capacity in the market, as evidenced by the government’s last debt issue, made last April, by a package of $1,000 million with a return of 12 %.
This issue had particular conditions because there was a macro test agreement with investors that by October 2025 would improve the rating by two degrees or a program would be signed with the IMF, if not the interest rate would increase from 0.25 percent to 4 %.
Fitch’s benchmark macroeconomic and fiscal forecasts do not mean that an IMF program will be agreed, Fitch added.
Tax pressure
The agency notes that therepurchase of part of the debtWith a maturity between 2025 and 2029, as well as the program of refinancing securities with private banks and the exchange of pension debt, they reduced financing needs by 0.5 per cent of GDP. However, he warns that the government will still need the domestic market in the short term to fund the nation’s overall budget.
For Fitch, the government’s debt will rise from 84.9 percent in 2023 to 86.5 percent in 2026. The fiscal deficit increased to 4.7 % of GDP in 2023 from 2.6 per cent in 2022, including commitments from the pension system.
Without IMF or other multilateral funding, high borrowing costs due to limited sources of financing will remain a key risk to public debt sustainability, as will the impossibility of improving the primary budget balance, he added.
By 2024, according to agency projections, the deficit will be reduced to 3.9 % and in 2025 it will be 3.4 %.
However, he warns that the government’s deeo – of maintaining high capital expenditure and increased wage spending will limit the ability to reduce the fiscal gap.
This article has been translated after first appearing in Diario El Mundo