The economist pointed out that the economic situation will remain “fragile,” despite fiscal movements to reduce the deficit.
Economist Mauricio Choussy warned on Wednesday that movements in the fiscal accounts could slow down the Salvadoran economy if the adjustment is not accompanied by a package of structural reforms.
Despite the benefits of the buybacks and the presentation of a budget that aims to reduce the fiscal deficit through an adjustment in public spending, the economic situation will remain fragile, the former president of the Central Reserve Bank (BCR) said in statements to Diario El Mundo.
For Choussy, a fiscal adjustment per se – it does not solve structural problems such as low growth, persistent low investment, low levels of productivity and lack of institutionality.
Over the past two weeks, the investor market has focused its attention on El Salvador after Nayib Bukele’s government presented the 2025 budget preliminary draft budget without including debt for current spending, as well as the announcement of a bond buyback with maturities between 2027 and 2052.
To reduce current spending on the 2025 budget, the government proposes a cut of 11,115 places, in addition to the freezing of ladder for health and education workers.
While Fitch Ratings believes that the proposal under discussion in the Legislative Assembly will not face resistance and is a sign of fiscal consolidation, El Salvador still faces uncertain access to the bond market and there is a risk that budget execution will not materialize.
We believe that these ambitious measures face risks of implementation, says the agency.
Country risk improvement
The country risk of El Salvador, measured by the Emerging Bond Indicator (EMBI), prepared by JP Morgan Chase, showed a sharp slowdown since the presentation of the preliminary draft budget, since on 30 September it stood at 569 points and by 15 October it stood at 489, a reduction of 80 points.
EMBI has returned to levels held shortly before the start of the co-vid19 pandemic and is at its lowest point since March 4, 2020.
Why does it matter? EMBI is a key indicator for investors because it measures the level of certainty of an emerging economy to meet its obligations. In the case of El Salvador, it was exaggerated in 2022 due to the uncertainty of payment of a bond in January 2023 and the country was placed as the riskiest in Latin America, only surpassed by Venezuela.
Choussy pointed out that the improvement in the level of risk due to the debt repurchase operation could encourage the government to issue debt on the international market without an agreement with the International Monetary Fund (IMF) and without trying to solve the structural problems of the Salvadoran economy.
“It would not be advisable in the long term, as it would resemble “kicking the ball forward,” said the economist.
In this line, S&P Global Ratings described the repurchase operation as an opportunist because it considered that the government could meet its financial obligations in the established maturities.
The offer, the fourth launched since 2022, included eight emissions for $6.2 billion, plus a $1 billion variable macro interest bond. At the close of the call, investors proposed $1,756 million, of which the government pledged to buy $940.4 million.
This article has been translated after first appearing in Diario El Mundo