Nov 14 - In a special report published today, Fitch Ratings says that El
Salvador is making some progress towards fiscal consolidation, but it may prove
insufficient given the country's weak economic prospects. Fitch currently has a
Negative Outlook on El Salvador's 'BB' sovereign rating, which reflects the
agency's concerns about the government's elevated debt burden, which constrains
its ability to cope with future shocks.
The government and the Legislative Assembly in El Salvador have agreed on the
need to bring public finances onto a more sustainable path. New tax reform and
expenditure-cutting strategies could reduce fiscal deficits in 2013 and 2014,
but this may not be sufficient to materially improve debt dynamics given
relatively weak growth prospects. 'Even if the passage of reforms facilitates
lower fiscal deficits, the non-financial public sector (NFPS) debt could still
remain above 51% of GDP by 2014, well over the 'BB'-median of 38%' said Santiago
Mosquera, a Director in Fitch's Latin America Sovereigns Group.
The current administration has been successful in implementing revenue-enhancing
measures. Gross tax collection could represent 15.9% of GDP in 2012, up from
12.6% of GDP in 2009. The government is about to send a bill with the third
fiscal reform since 2009, one that could lead to an increase in government
revenues by 0.3% of GDP in 2013. The previous two reforms were intended to
generate additional tax proceeds equivalent to 1.3% of GDP after their full
implementation (in 2013).
At the same time, the government is expected to impose a 10% current-expenditure
cut and administrative measures in an attempt to cut the NFPS deficit from 3.9%
of GDP expected in 2012 to 2.7% in 2013. 'The fiscal effort to support such a
deficit-reduction strategy will be challenging, particularly given El Salvador's
weak economic prospects, high social security costs, and high deficit in 2012,'
added Mosquera. The Fiscal Sustainability Accord signed on October 18 authorized
an USD800 million bond issuance to finance debt management operations. The
proceeds should first cover the unlikely early payment of a bond with a put
option due in January 2013, while the balance could finance buybacks of
short-term debt (Letes). Fitch sees the issuance of global bonds to be neutral
for debt ratios because of the strict use of the proceeds, although El
Salvador's debt maturity profile could improve moderately.
The Fiscal Responsibility Accord also opened the door for the implementation of
a fiscal rule to reduce fiscal policy discretion and enhance transparency. Fitch
believes that further strengthening of the existing fiscal framework via a
fiscal rule will be positive, although experiences in other countries show that
a fiscal rule per-se does not guarantee fiscal discipline. Moreover, it is
unclear how ambitious the goals set by the fiscal rule would be or the timeline
for its implementation.
Fitch's special report, 'El Salvador's Fiscal and Financing Challenges' is
available at 'www.fitchratings.com'.