The money that the Salvadoran government is lending locally is becoming increasingly expensive. According to data from the Ministry of Finance, debt placed at rates greater than 9 per cent grew by 91 per cent in one year and only within one month (September to October) rose 22 per cent, adding $494.5 million to rates above that percentage.
As of October, a total of $2,654.8 million had a rate of more than 9 percent. This is equivalent to 16 per cent of all debt and if it is added to that placed at rates of between 6 % and 9 per cent, the percentage of the debt at rates above 6 per cent represents 74 per cent of the country’s total debt.
Five years ago, the country had no debts with rates greater than 9 percent and the placements with rates of between 8 % and 9 % only represented 10 percent of the total debt ($1,317.4 million).
But since 2020, debt has become more expensive. In July of that year, in the midst of a pandemic that put the country on high alert, the government lent $1 billion in bonds to meet health emergency spending. That debt was placed at a rate of 9.5 percent interest.
What the country requires to build confidence in international investors is that there be an agreement with the IMF and, therefore, that there be a fiscal plan to make its debt sustainable
Luis Membreño, Economist.
in the long term.
Since then, rates have continued to rise as the Government resorts to more local debt, given that it cannot access international markets, precisely because of its high risk of default.
As a result, the government will have to pay $2,144.6 million in capital and interest this year. This is the largest expenditure the government will have to make this year, according to the General State Budget. For economist Luis Membreño, this increase in the interest rate is due to the refinancing that the Ministry of Finance has made with the local debt in the last year.
In October 2023, for example, the government placed $33 million in domestic bonds at a rate of 9.75 per cent after it reached an agreement with the Salvadoran bank to ensure that the debt that previously had a payment period of 1 year would be extended to 7 years.
The pension debt, which was obtained through the placement of Forecast Investment Certificates (CIP), paid maximum rates of 5.5 per cent, but now that it was moved to a longer term, under the figure of Certificates of Security Obligations (COPs) it will have to pay a rate of 7 % for it.
The rise in these interest rates, in addition, are related to the fact that most debt holders (more than 53 per cent) are private investors, for whom El Salvador’s risk profile is key in setting the cost of the money they lend to it.
Multilateral agencies such as the World Bank (WB), the Inter-American Development Bank (IDB) and the International Monetary Fund (IMF) have historically lent money to the country at interest rates of around 2 per cent to 4 per cent, but in recent years, their loans have decreased and only the Central American Bank for Economic Integration (BCIE) has been the country’s main financier.
However, this agency has also raised interest rates to the country as one of the $250 million loans approved in December 2022 has an interest rate of 7.41 per cent.
According to Finance Minister Jerson Posada, the government is executing different operations to improve debt conditions.
Best rating
El Salvador finished 2023 with a much lower risk rating than it had in 2022. The emerging markets bond indicator (EMBI) reached 6.86 per cent, a much better figure than in 2022, when its country risk rose to more than 18 per cent.
However, this improvement does not help much to reduce interest rates for El Salvador, as it remains much higher than that of other Central American countries that have a much lower country risk index (2 per cent, 3 per cent) and therefore manage to place their debt at a lower price.
By way of comparison, Costa Rica placed $1.5 billion at an interest rate of 7.5 per cent in November last year.
Membreño added that if the country wanted to place foreign debt, it needs to have an agreement with the International Monetary Fund (IMF), whose negotiations with El Salvador are maintained, but they have not reached a concrete agreement.
One of the turning points has been bitcoin as a legal tender because although the international body suggested that the government reconsider this financial decision, the authorities have not backed down.
In fact, Membreño believes that the government will be excited again with an increase in the price of the cryptocurrency (yesterday its price exceeded $45,000) and negotiations would not advance.
This article has been translated from the original which first appeared in La Prensa Grafica