NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed El Salvador's long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-'. Fitch has also affirmed the issue ratings on El Salvador's senior unsecured foreign and local currency bonds at 'BB-'. The Rating Outlook on the long-term IDRs is Negative. In addition, Fitch has affirmed El Salvador's Country Ceiling at 'BB+' and short-term foreign currency IDR at 'B'.
KEY RATING DRIVERS
El Salvador's rating affirmation reflects the following rating drivers:
-- 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 strong track record in implementing tax reforms despite the low economic growth environment.
-- A dialogue between the new FMLN government and main private-sector organizations has the potential to define a national strategy for sustainable development and social inclusion. This comes after five years of confrontation during the previous administration. However, it is too early to predict that such dialogue could result in improved investment and growth prospects over the forecast period. Risks for a break-down in this discussion process remain due to the high levels of mutual distrust and alternative views on fundamental issues, including public sector participation in the economy and public finances.
-- Economic growth in El Salvador remains low relative to its peers in the 'BB' category. Key structural weaknesses, including low competitiveness, relatively high energy costs, low investment ratios, weak human capital and high crime rates preclude El Salvador's economy from growing faster. In Fitch's baseline scenario GDP growth could average 1.6% in 2014-2016.
-- The deficit for the Non-Financial Public Sector in 2013 reached a level equivalent to -4.1% of GDP, up from -3.4% of GDP in 2012. The tax burden in El Salvador grew from 12.6% of GDP in 2009 to 15.4% of GDP last year, as a result of various tax reforms and revenue collection enhancements. The administration is pursuing a new tax reform that includes a financial transaction tax as well as taxes on newspapers and luxury real estate.
-- El Salvador's public debt burden continues to increase and could exceed 62% of GDP in 2014, significantly above the 35% median for the 'BB' category. In the absence of a substantial pickup in economic growth and a front-loaded fiscal consolidation strategy, Fitch forecasts debt to continue climbing and reach a level equivalent to 65% of GDP by 2016. The government has submitted a fiscal responsibility framework for legislative approval, although most of the fiscal adjustment appears to be concentrated after 2017.
-- El Salvador's current account deficit (CAD) continues to widen and in 2013 was equivalent to 6.5% of GDP, more than twice the median observed for 'BB' rated countries. While El Salvador has historically shown moderate CAD, the deterioration observed in recent years has coexisted with a reduction in net foreign direct investment, particularly in 2013. Given its exchange rate regime and the absence of fiscal savings, the country's ability to adjust to external shocks is limited, making it dependent on external funding availability.
RATING SENSITIVITIES
The main factors that individually, or collectively, could trigger negative rating action:
-- Renewed deterioration in the political and business environment that undermines prospects for reforms to improve the business climate, investment and growth prospects.
-- Continued economic underperformance compared with peers.
-- Fiscal slippage and the lack of a credible fiscal consolidation strategy which results in a significant deterioration in government debt dynamics and evidence of financing constraints.
The main factors that individually, or collectively, could stabilize the rating:
-- An improved political environment conducive to addressing fiscal and economic challenges resulting in better investment and growth prospects;
-- Signs of stabilization in the public-debt burden over the medium term.
KEY ASSUMPTIONS
The ratings and Outlook are sensitive to a number of assumptions:
-- U.S. economic growth increases from 1.9% in 2013 to 2.0% in 2014, 3.1% in 2015 and 3.0% in 2016;
-- The government in El Salvador is able to tap the local and/or foreign financial markets to cover its financing needs during the forecast period;
-- Social tensions remain relatively well-contained.
Additional information is available on www.fitchratings.com
THE ISSUER DID NOT PARTICIPATE IN THE RATING PROCESS, OR PROVIDE ADDITIONAL INFORMATION, BEYOND THE ISSUER'S AVAILABLE PUBLIC DISCLOSURE
Applicable Criteria and Related Research:
--'Sovereign Rating Criteria' (Aug. 13, 2012);
--'Country Ceilings' (Aug. 9, 2013).
Applicable Criteria and Related Research:
Sovereign Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685737
Country Ceilings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715618
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=839135
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