Neither the repurchase nor the issuance of debt have caused the risk indicator to El Salvador to go down, on the contrary, it is higher than the days when these financial transactions were made.
The country risk indicator obtained by the emerging markets risk indicator (EMBI) prepared by JP Morgan is a reflection of investors’ perception (of bonds); the higher the indicator, the higher the risk perception.
El Salvador has reached more than 35.12 percent in July 2022, had reached a downward curve since the beginning of 2023 and started 2024 with 6.87%. When on April 8, the government announced that it would repurchase part of the debt of 2025, 2027 and 2029 the EMBI was around 6.14%, the Ministry of Finance had not yet said how much the buyback would be, or where it would obtain the funds for that purpose.
A day later it was known that they would make an issue of international debt. Economists and investment banks had already warned that the market was still very expensive for El Salvador, as the country’s risk remained high.
To compare, the indicator for neighboring countries is 1.97 for Costa Rica; 2.06 for Guatemala, 3.63 Honduras and 2.63 Panama.
For El Salvador it would be expensive because that EMBI of 6.14 would have to be added the rate of US treasury bonds to 10 years, to calculate how much the markets were going to lend.
And so it was, El Salvador went out to the international markets to look for $1,000 million at a rate of 9.5%, but had to lower the price, so the implied rate he paid was 12%. Of the highest on the market. After these debt issuance and repurchase transactions, El Salvador’s EMBI rose again and until May 3 it was 7.20%, 1.06 more than when it announced the buyback.
Many people bought to refinance what was going to be won and the interest rate that is going to be paid was attractive; and that makes everyone really rethink what the risk is of El Salvador, says economist Luis Membreño.
For the economist, the country’s risk is in the medium term, as the payment of the 2025 bond is practically covered, but there are strong maturities from that date. The 2027 bond, that of 2029; moreover, that last April’s issue (bonus 2030) implies capital payments every two years, in 2026, in 2028 and 2030.
The country has paid every year from 2026, and then has to pay the bonds issued in the Salvadoran market at 2,3, 5 and 7 years that began and issued in 2023, he explains… and to this is added the pension debt, it becomes a very big snowball.
El Salvador did not leave at all with the issue, what he did is a debt rollover, on the one hand; on the other, he increased the debt and increased the payment of interest too, he says. Membreño explains that he refined short-term debt for which he paid 7.25% to medium-term debt for which he pays up to 9.50 and that increases the debt.
EMFI Group notes that the refinancing operation was too costly and had a negative effect on the country’s debt sustainability, although it marginally improved the likelihood of short-term repayment.
The Group explains that in net terms, the operation reduced debt service to be paid in the period 2024-2027 by $151 million… and left only $100 million outstanding of 2025, $633 of 2027 and $530 of 2029, but did so at the cost of significantly increasing the service of the debt afterward.
You don’t see a way out. It looks like they kicked the ball a little bit, but they didn’t kick it too far, but there just, adds Membreño.
This article has been translated from the original which first appeered in La Prensa Grafica