Photographer: Alejandra Parra/Bloomberg

El Salvador ‘Guarantees’ No Risk to Investors Amid Default

  • Finance minister says missed payments due to political impasse
  • S&P and Fitch both cut nation’s sovereign rating this week

A political stalemate that caused El Salvador to default on some local debt poses no risk to foreign investors, said Finance Minister Carlos Caceres.

“We regret the worry that this has caused for our investors and we’re aware of the effects of this issue, but we guarantee that other obligations are not affected,” Caceres said in a telephone interview from El Salvador.

Caceres spoke hours before S&P Global Ratings cut El Salvador’s credit rating, saying a “selective default” appeared inevitable after the government missed $28.8 million in payments to a local pension fund. It was the second credit downgrade in two days after Fitch Ratings on Monday said the Central American nation was in “default on its sovereign obligations.”

The payments were the latest casualty of a long-running political standoff between the government and the main opposition party, ARENA, which have battled in congress over fiscal decisions. The ruling FMLN party was able to pass a budget in January, but it did not include the pension fund payments.

Last week, a bill to authorize a supplemental budget increase failed to pass. Caceres said he “has the cash,” but can’t make the payments until a deal to boost the budget is reached.

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Unlike the payments to the pension fund, lawmakers have already authorized other debt payments, Caceres said. The budget set aside $915 million for that purpose, he added.

“It’s important to highlight that this situation is temporary due to the lack of a political agreement, but that the country will continue to comply with all its obligations,” he said, adding that he’s “optimistic” lawmakers will come to an agreement allowing the pension fund payments to be made.

Yields on El Salvador’s benchmark dollar bonds due 2025 tumbled 3.5 percent in the last three days before posting a slight rebound today. At 12:39 p.m. NY time, the yield was up 2 basis points to 8.11 percent.

Caceres said the government, which sold $600 million in dollar bonds in February, has no plans to return to global markets this year and will raise money on local debt markets to finance the budget. The $26 billion economy is expected to grow 2.5 percent to 3 percent this year, he said.

S&P lowered its long-term foreign- and local-currency sovereign credit ratings on El Salvador to CCC- from B-, placing the country on negative credit watch. The ratings company said it expected to resolve its credit watch placement within five business days, based on the outcome of political negotiations.

Fitch had cut the foreign currency rating to CCC from B with a negative outlook, placing it in the same category as Venezuela, Greece and the Congo.

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