El Salvador – Partisan Battles Add to Debt Risk

On April 10, the rating agency Fitch released a statement declaring the government of El Salvador to be in selective default on its debt obligations, owing to its failure to make a scheduled payment of $29 million to a local pension fund. Citing the missed payment, Fitch revised the long-term local-currency debt rating from B to Restricted Default, and also downgraded the foreign-currency rating, from B to CCC. Both Standard and Poor’s and Moody’s took similar action shortly afterward, despite Finance Minister Carlos Cáceres’ issuance of a “guarantee” that holders of foreign-currency debt had no reason to fear non-payment.
Cáceres stressed that the 2017 budget approved in January earmarked sufficient funds to service the foreign-currency debt in 2017, and that the delay in making the payment to the pension fund was not the result of a lack of cash, but rather resulted from a legislative impasse that he expressed confidence could be broken in fairly short order.
Unfortunately, Cáceres’ attempt at reassurance only served to underscore the political factor that prompted the ratings downgrades, namely, the government’s uncertain ability to prevent the main opposition Arena from using its leverage in the legislature to block President Salvador Sánchez Cerén’s administration from accessing the funding required to meet all of its obligations. In that regard, the risks will be particularly high in 2019, when total payments falling due on dollar debt could reach $1 billion, and a presidential election scheduled for February of that year will give Arena an incentive to undermine the FMLN government.
The main disagreement between the FMLN and Arena with regard to fiscal policy involves strategy. The left-leaning FMLN favors measures designed to fuel a demand-driven recovery, while Arena advocates cuts in social spending with the aim of creating room for tax relief that, in combination with the relaxation of regulations, will attract increased investment that fuels faster economic growth. Of course, quite apart from any ideological factors, the FMLN’s status as the incumbent party provides an additional reason to steer clear of spending cuts. As such, there is good reason to expect that the policy battle will persist at least through the next election cycle.
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