Fitch Upgrades the Credit Rating for El Salvador to B-, Stable Outlook
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The main driver of the upgrade is the agreement with the IMF, pending ratification by its Executive Board in February. Fitch included a summary of the country’s finances, noting that public debt reached 87.7% of GDP in 2024.
Credit rating agency Fitch announced on Tuesday that it upgraded El Salvador’s Long-Term Foreign Currency Issuer Default Rating (IDR) from CCC+ to B-. The outlook is stable.
According to Fitch, the upgrade reflects “reduced financing needs and easing of funding constraints,” supported by the country’s regained access to international markets and, most notably, the IMF program announced in December.
The IMF and the Salvadoran government reached a staff-level agreement on a 40-month Extended Fund Facility (EFF) program worth $1.4 billion to support government reforms. The deal is subject to approval by the IMF Executive Board in February.
“Fitch expects the program to support the implementation of fiscal consolidation measures that, along with a reduction in outstanding short-term debt to domestic banks and the external debt buybacks carried out through liability management operations last year, should reduce financing needs. Successful consolidation could also boost investor confidence in El Salvador’s debt sustainability and enable further bond issuances,” Fitch wrote in the upgrade announcement.
This announcement marks the second time in recent years that Fitch has upgraded the credit rating for El Salvador, signaling growing confidence in the nation’s fiscal trajectory.
The Impact of the IMF Agreement on El Salvador’s Economic Outlook
The agreement with the IMF is pivotal in Fitch’s upgraded credit rating for El Salvador. The Extended Fund Facility (EFF) is designed to bolster government reforms and provide fiscal stability, aiming to address the nation’s high public debt and deficit levels. By including budgetary consolidation measures, such as reducing short-term domestic debt and external debt buybacks, the program lays a foundation for financial improvement.
Despite these positive indicators, challenges remain. Fitch’s projections underscore a delicate balance between fiscal responsibility and the potential for economic strain, emphasizing the need to carefully monitor public sentiment and investment confidence.
A Summary of El Salvador’s Finances
Fitch estimates the Non-Financial Public Sector deficit at 4.7% of GDP in 2024, unchanged from 2023.
The agency includes an estimate of the pension deficit, which is not reflected in official data. It notes that revenues grew by around 9%, driven by increased consumption and income taxes. Meanwhile, expenditures rose by about 14% due to higher wages, interest payments, and capital expenditures.
Fitch explains that the higher wage expenses include a one-time severance payment to public employees who opted for voluntary early retirement packages. Interest payments increased due to the higher cost of borrowing, partly reflecting the extended maturities resulting from previous liability management operations.
However, the agency states that the interest burden benefits from a four-year grace period on pension-related debt granted to the government after completing a debt swap with private pension funds (AFP) in May 2023, during which interest payments are capitalized.
“Fitch classified this as a distressed debt exchange,” it noted.
The agency also highlighted that the 2025 budget aims for a global balance adjustment by 1.9% of GDP through significant spending cuts (e.g., a general wage freeze for public sector employees) and projected revenue increases (e.g., improved tax administration). Fitch provides an optimistic estimate, predicting that the deficit will decline to 2.9% of GDP in 2025, down 1.8 percentage points from 2024.
This fiscal discipline is another reason why Fitch upgraded El Salvador’s credit rating, showcasing the government’s ability to implement difficult reforms.
Fitch estimates total public debt reached 87.7% of GDP in 2024, up from 84.9% in 2023. It expects this ratio to remain around this level in 2025 and decrease slowly to 87% by the end of 2026.
“However, as in previous pension debt swaps, the debt-to-GDP ratio could rise significantly in 2027 due to the repayment of accrued interest from the 2023 grace period extension,” the agency clarified.
Growth of 1.9% for 2024
Fitch forecasts El Salvador’s real GDP growth will slow to 1.9% in 2024, down from 3.5% in 2023. This significantly lowers the outlook compared to the Central Reserve Bank (BCR), which had optimistically projected 4% growth.
It is also much lower than the growth estimates of 3% by the International Monetary Fund and 2.9% by the World Bank.
On the other hand, Fitch expects growth to rise to 2.3% in 2025 and then gradually return to its low historical average of 2% (2001–2019) in the medium term.
The agency considers the outlook to have mixed risks. It sees upside potential if the government’s efforts to improve security lead to stronger investment prospects or if higher-than-expected U.S. growth positively impacts remittances and exports. The United States is El Salvador’s leading trading partner and the destination for one-third of its goods.
“Conversely, the reelection of Donald Trump as U.S. president could lead to stricter immigration policies and a more protectionist U.S. trade stance, negatively affecting remittances (which mostly come from the U.S. and account for 24% of GDP) and exports,” Fitch added.
The improved credit rating for El Salvador underscores both the progress made through fiscal reforms and the challenges posed by broader economic uncertainties. Fitch’s decision to upgrade the credit rating for El Salvador highlights the nation’s potential to create a more stable financial environment. By focusing on sustainable fiscal policies, the country could enhance its investment climate and achieve more stable economic growth.
Conclusion
El Salvador’s upgraded credit rating reflects a critical juncture in its economic trajectory as it seeks to balance fiscal consolidation with sustainable growth. While the IMF agreement and government reforms offer a pathway to improved financial stability and investor confidence, challenges such as high public debt, slower GDP growth, and external vulnerabilities remain significant. El Salvador’s ability to implement effective policies, maintain fiscal discipline, and capitalize on opportunities to attract investment will determine its success in building a resilient and prosperous economy.
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