El Salvador’s sovereign debt has skyrocketed this week (prices are rising and bond interest rates are falling) after President Nayib Bukele assured that the 2025 budget would not involve the issuance of new debt, indicating its plans for fiscal austerity, a key step to unlock a long-awaited program with the International Monetary Fund. Although bonds had already performed well in recent months, this message provided the final push to 10-year bond falls to 10.5% interest, a level not seen since before covidThe pandemic has upended the country’s accounts, increasing the debt and the interest it pays. The 10-year bond on the secondary market reached a yield of 20% at the height of the crisis, seriously questioning the country’s financial stability.
El Salvador’s President Nayib Bukele promised Sunday that he would appear before Congress a draft budget for 2025 “fully financed” from own resources (no new debt will be issued because there will be no deficit)so that the country does not spend more than it produces. “I announce that on September 30, we will present to the Legislative Assembly, for the first time in decades, the first fully financed budget, without the need to issue a single cent of debt for current expenditures,” Bukele said in his speech for the 203rd anniversary of Central American independence.
This speech, together with the improvement of other indicators (inflation, confidence, etc.), triggered financial euphoria in El Salvador. Bond prices rise across the curveand those expected in 2035 gained several cents on the dollar to reach their highest level since 2020, according to price data compiled by BloombergThe bond yield fell more than 60 basis points to 10.5%.
Bukele’s announcement is like a “May day watering” for the country’s debt, as it comes after El Salvador’s bonds have been faltering for months due to concerns about the government’s ability to meet its payments, after Bukele failed to reach agreements with the IMF. The multilateral lender cited the country’s lack of fiscal consolidation and the adoption of bitcoin as its official currency as reasons for the delay. It now appears that the Salvadoran president is ready to comply, given the success of Javier Milei and his policies in Argentina, where the financial economy has awakened with intensity.
Bukele must fix his finances
“There has been some fiscal and economic deterioration over the last year, but the promises suggest that, at least on the fiscal side, they will move in the right direction,” said Carlos de Sousa, emerging markets debt portfolio manager at Vontobel Asset Management. “This is a vague promise, but a little more explicit, of a zero budget deficit.” Bank of America also raised the country’s debt rating from market weight to overweight after an investor trip to the Central American country, favoring bonds maturing in 2035.
“We sense that the government and the IMF are closer than ever to a deal, after years of negotiations,” the bank’s analysts Lucas Martin, Alex Muller and Jane Brauer wrote in a note Monday. Even the bitcoin dispute, which has long been a major obstacle to a deal, could be resolved given Bukele’s “softer tone” of late, according to Nathalie Marshik, an emerging markets sovereign debt analyst at HSBC Securities.
Arif Joshi, who helps oversee about $9 billion as co-head of emerging markets debt at Lazard Asset Management, said in a statement to Bloomberg who has been waiting for an agreement for two years. “I want to see it come to fruition.”
Many other investors will also be waiting for further evidence on how the government will reduce the budget deficit, which stood at 2.5% of gross domestic product in the 12 months to July. Others remain concerned about Bitcoin. “The signal of a balanced budget is usefulBut the biggest hurdle for a fund program remains whether an agreement can be reached on bitcoin as legal tender,” said Jared Lou, portfolio manager at William Blair.
A boost for the economy
The International Monetary Fund targeted in June an economic growth of 3% for the national economy in 2024. These figures are in line with the forecasts of the Central Reserve Bank (BCR) which are between 3% and 3.5% for this year. The Salvadoran economy continues to present positive growth figures compared to the region since, according to the IMF, Latin America and the Caribbean will experience a growth of 2% this year.
“The Latin America and Caribbean region has shown remarkable resilience in the face of recent global challenges and has recovered from the pandemic stronger than expected. Growth is now moderating, from 2.3 percent in 2023 to 2.3 percent in 2024, as most economies are at their potential,” the IMF said.
It is worth noting that at the time of his second presidential term, President Nayib Bukele stated that during this five-year period he would prioritize the country’s economic growth, having made El Salvador the safest country in the Western Hemisphere, thanks to his successful security strategies. After the success of the recipe for reducing crime, it is now time to check if the economic recipe works in the same way.
