Fitch Affirms El Salvador's FC IDR at 'BB'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has taken the following rating actions on the Issuer Default Ratings (IDRs) and Country Ceiling for Rating:

--Foreign currency IDR affirmed at 'BB';
--Local currency IDR affirmed at 'BB';
--Foreign currency short-term IDR affirmed at 'B';
--Country ceiling affirmed at 'BBB-'.

The Rating Outlook is revised to Stable from Negative.

The Outlook revision reflects the government's progress in terms of fiscal consolidation efforts, the expected broad stabilization of public debt burden as well as its strong commitment to comply with the precautionary IMF Stand-by Agreement, which should deliver further fiscal consolidation in 2011.

Fitch also notes that financing constraints have been materially reduced over the past two years due to liability management and that the government enjoys continued strong support from multilaterals. The country has not had to tap IMF Stand-by resources highlighting the stability of the financial system despite the unfavorable economic conditions. On the other hand, low growth, fiscal rigidities and a relatively high debt burden constrain El Salvador's ratings.

'Over the past two years, the Funes administration has made progress in reducing financing pressures through multilateral support and access to international capital markets as well as appropriately managing the increased fiscal challenges,' said Erich Arispe Director in Fitch's Sovereign Group.

The NFPS recorded a deficit of 4.2% of GDP in 2010, significantly lower than the 5.6% 2009 deficit and below the 4.8% benchmark set under the IMF's SBA.

Continued revenue growth and some expenditure restraint have aided the fiscal consolidation process. Fitch expects El Salvador to achieve its deficit target (3.5% of GDP) under the IMF program in 2011. However, Fitch notes that in light of modest growth, a narrow revenue base and continued social pressures, tax revenues would need to increase further over time to ensure a sustained fiscal consolidation process.

The NFPS debt rose to 50.8% of GDP, significantly above the 38.4% 'BB' median, and could increase further to 51.6% in 2011 before declining slightly in 2012, according to Fitch's base case. Nevertheless, the sovereign has a manageable amortization profile over the forecast period (averaging 1.4% of GDP in 2012 and 2013). In addition, the present administration has been able to reduce short-term debt significantly.

'Weak growth prospects and relatively high public debt burden make the country's fiscal and government debt trajectories quite vulnerable to external and domestic shocks,' added Arispe.

In comparison to the region, the Salvadoran economy was slow to recover in 2010. Growth prospects at 2.2% in average during the 2011 - 2013 period appear weaker than those of most peers in the 'BB' category, mainly as a result of the country's narrow export base, high crime rate, low investment levels and weak productivity.

In addition, while the Funes administration has been able to secure a legislative majority to support its reforming agenda, limited advances on security and crime reduction, together with a high level of political polarization are affecting private investment and growth prospects. While the government has developed long-term growth initiatives, their impact on economic growth would likely take time to materialize.

Renewed pressure on public debt dynamics, emergence of financing constraints, and political gridlock that would derail fiscal consolidation could undermine creditworthiness. On the contrary, El Salvador's ratings could improve in the event of a sustained and significant reduction in public debt burden as well as a greater growth momentum.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:
--'Sovereign Rating Methodology' (Aug. 13, 2010).

Applicable Criteria and Related Research:
Sovereign Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547765

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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:
Erich Arispe, +1-212-908-9165
Director
or
Committee Chairperson:
Shelly Shetty, +1-212-908-0324
Senior Director
or
Media Relations:
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com

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:
Erich Arispe, +1-212-908-9165
Director
or
Committee Chairperson:
Shelly Shetty, +1-212-908-0324
Senior Director
or
Media Relations:
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com