Fitch Rates El Salvador's 2025 Global Bonds 'BB'

NEW YORK--()--Fitch Ratings assigns a 'BB' rating to El Salvador's US$800 million global bonds due in 2025. The ratings are in line with El Salvador's long-term foreign currency Issuer Default Rating (IDR) of 'BB', which has a Negative Outlook. The government is re-entering international capital markets with the objective of securing funds for an unlikely early payment of a bond with a put option due in January 2013, while the rest could finance buybacks of short-term debt (LETES).

El Salvador's ratings are supported by its macroeconomic stability underpinned by dollarization, its adequately capitalized financial system, and solid repayment record. The government has a good track record in implementing tax reforms despite the low economic growth environment.

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. In Fitch's view, global economic uncertainty poses additional downside risks to the agency's economic projections for El Salvador.

Government revenues continue to grow supported by tax reforms and administrative measures, but the tax burden remains below the median in the 'BB' category. Spending-overruns have undermined consolidation efforts. The Non-Financial Public Sector's (NFPS) deficit reached -3.9% of GDP in 2011, and Fitch expects only a slow consolidation process in the coming years.

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 between 2012 and 2014. El Salvador's debt profile has deteriorated due to a build up in short-term debt (LETES), exposing the sovereign to higher roll-over risks. Market access remains good, but yields in the local market have increased lately.

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, downside risks are present as no single party has legislative majority and political polarization remains high ahead of the 2014 presidential elections.

Continued economic underperformance relative to peers, inability to decisively cut debt burden, and evidence of financing constraints could undermine creditworthiness. 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' (Aug. 13, 2012).

Applicable Criteria and Related Research:

Sovereign Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685737

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Contacts

Fitch Ratings
Primary Analyst
Santiago Mosquera, +1-212-908-0271
Director
Fitch, Inc.
One State Street Plaza
New York, NY, 10004
or
Secondary Analyst
Lucila Broide, +1-212-908-0898
Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Santiago Mosquera, +1-212-908-0271
Director
Fitch, Inc.
One State Street Plaza
New York, NY, 10004
or
Secondary Analyst
Lucila Broide, +1-212-908-0898
Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com