Despite the improvement, El Salvador’s debt levels remain high, according to Fitch.
The improvement in the rating reflects the reduction in financing needs.
The risk rating agency Fitch Ratings announced this Tuesday, January 7, that it improved the rating of El Salvador, moving it from CCC+ to B-, as a result of the agreement reached between that country and the International Monetary Fund (IMF).
In a press release, Fitch Ratings reported that the rating outlook is stable and that the upgrade reflects “reduced financing needs and easing financing constraints supported by the recovery of market access and the recently announced IMF program.”
Fitch anticipates that the program will boost the implementation of fiscal consolidation measures. These, combined with the decrease in short-term debt with local banks and the repurchase of external debt from the last year’s liability management operations should reduce financing needs.
According to the rating agency, the agreement reached between El Salvador and the IMF on December 18, for a loan of 1.4 billion dollarsis one of the “key rating drivers.” This agreement includes legal changes so that the acceptance of bitcoin becomes voluntary and not mandatory in private companies in the country, as reported by CriptoNoticias.
Despite the rating upgrade, El Salvador’s debt levels remain high. Fitch expects the debt-to-GDP ratio to remain around 87.7% in 2025 and fall slowly in 2026, reaching 87.0% by the end of that year.
According to Fitch, real GDP growth will slow to 1.9% in 2024 from 3.5% in 2023. After slow growth in the first half of 2024, economic activity began to rebound in the second half of 2024amid ongoing infrastructure projects and increased tourist arrivals, despite a slowdown in private consumption. Growth is expected to increase to 2.3% in 2025 and then slowly return to its low average of 2.0% (2001-2019) in the medium term, the entity says.
The outlook faces mixed risks. There is upside potential if the government’s efforts to improve security drive higher investment prospects or if stronger-than-expected growth in the United States positively affects remittances and exports, the firm says.
On the contrary, the re-election of Donald Trump to the presidency of the United States could lead to stricter immigration policies and a more protectionist trade stance that affects remittances, mostly from the United States and equivalent to 24% of GDP, and exports, a third of which go to the United States, highlights Fitch Ratings.
Fitch establishes that, if there is fiscal consolidation that supports a sustained reduction in public debt/GDP, interest on income and financing needs, as well as a sustained improvement in foreign exchange reserves that alleviates risks to the system financial and strengthen the ability to pay debt, they are likely to become factors that could, individually or collectively, lead to positive rating action/upgrade in the future.
The improvement of Fitch Ratings’ rating for El Salvador occurs almost two years after they already reported the improvement to the CCC+ range, in May 2023, as reported by CriptoNoticias. At that time, the risk rating agency indicated that the improvement was due to the timely payment – and with interest – of the 2023 bond, with which Nayib Bukele’s government honored its debt on January 23 of that year, one day before its expiration.
Not only Fitch has improved El Salvador’s rating, since, in November 2024, the rating agency Moody’s improved the risk rating, raising it from Caa1 to B3, reflecting a more positive perception of the economy of the Central American country, as reported by this medium. .