Fitch Ratings affirms El Salvador's ratings as follows:
--Foreign and local currency Issuer Default Ratings (IDRs) at 'BB';
--Short-term IDR at 'B';
--Country Ceiling at 'BBB-'.
The Rating Outlook is revised to Negative from Stable.
The Outlook revision reflects El Salvador's sustained economic growth
underperformance relative to peers, which is expected to continue during
the forecast period due to structural impediments faced by the economy.
High fiscal deficits and difficulty in consolidating fiscal accounts
faster have resulted in a debt burden persistently above 50% of GDP,
well above the 'BB' median. This restricts the government's policy room
to respond to external and domestic shocks. In Fitch's view, global
economic uncertainty poses additional downside risks to the agency's
economic and fiscal projections for El Salvador.
El Salvador's economic growth prospects are weaker than those of most
peers in light of the country's low competitiveness and investment
levels, and high crime rates. Government initiatives to accelerate
growth and to improve the business climate have been slow to materialize.
Despite the sluggish economy, tax collection continues to grow supported
by tax reforms and administrative measures. However, the tax burden
remains below the median in the 'BB' category. Spending-overruns have
undermined consolidation efforts. The NFPS deficit reached -3.9% of GDP
in 2011, and Fitch expects only a slow consolidation process in the
coming two years due to continued spending pressures and in the absence
of a significant revenue-enhancing tax reform.
El Salvador's debt burden increased further in 2011 and reached 52% of
GDP (compared to 39% for the 'BB' median). Fitch expects it to remain
elevated and above the 'BB' median during the forecast period. El
Salvador's debt profile deteriorated due to a build up in short-term
debt (LETES), exposing the sovereign to higher roll-over risks. Market
access remains good, although yields in the local market have increased
El Salvador has lost access to funds under the IMF's Stand-By Agreement
(SBA) due to non-compliance with fiscal targets. While the authorities
treated this as a strictly precautionary agreement, it did provide an
anchor for the fiscal consolidation strategy. Fitch notes that
negotiations continue with the Fund and are expected to result in some
sort of agreement. The government intends to maintain a SBA until the
end of this presidential period in June 2014.
Fitch does not expect to see a political gridlock between 2012 and 2014
related to the passage of the 2013 budget and additional long-term
borrowing. However, Fitch notes that that downside risks are present as
no single party has legislative majority and political polarization
remains high ahead of the 2014 Presidential elections.
El Salvador's ratings are supported by its macroeconomic stability
underpinned by dollarization, its adequately capitalized financial
system, and solid repayment record. At the same time, the government has
a strong track record in implementing various tax reforms despite the
low economic growth environment.
Continued economic underperformance relative to peers, inability to
decisively cut debt burden over the forecast period, and evidence of
financing constraints could undermine creditworthiness. On the other
hand, ratings could stabilize if growth performance improves and
government debt burden is reduced.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Sovereign Rating Methodology', dated Aug. 15, 2011.
Applicable Criteria and Related Research:
Sovereign Rating Methodology
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