The Big Idea
El Salvador | Lessons learned
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
The extensive negotiations between El Salvador and the International Monetary Fund suggest a fast track to a final agreement in May and perhaps even lower execution risk. The markets have already largely priced in the positives of an IMF program, but there should be residual upside from staff approval following an IMF mission as early as next month. One important gain for El Salvador is the potential for Eurobond issuance to help an under-funded budget this year. But any new issue premium should be minimal if the IMF has provided a financial anchor and if high yield EM offers few alternatives.
There have not been any headlines since the initial confirmation from Minister of Finance Zelaya of formal IMF advanced negotiations. This is not the same open public forum as the IMF negotiations in Costa Rica but rather informal and behind-closed-door discussions that have occurred since the last Eurobond issuance in July 2020. The negotiations should be well advanced if only for the lengthy period of informal discussions. The April 2020 IMF staff notes from the Rapid Financing Instrument should provide a preview. There was specific IMF recommendations for a cumulative fiscal adjustment of 3% of GDP from 2021 to 2024, including revenue-enhancing measures and a decrease in current spending to hit a primary surplus of 3.5% of GDP by end 2024. It is clear that after El Salvador’s debt rose to nearly 90% of GDP last year to finance a 30% year-over-year surge in spending, hitting IMF targets will require not only an unwind of Covid-related spending but further cutbacks and revenue measures.
There has already been a reduction in spending through the fourth quarter of 2020 with limited access to credit, forcing a cutback on spending closer to the structural nominal deficit of 4.3% of GDP (annualized basis on 4Q20) compared to the 10% of GDP performance for full year 2020. The revenue-enhancing measures are typically the more controversial component of any adjustment program; Costa Rica heard loud opposition to tax hikes. Minister Zelaya suggests that there are no plans for tax hikes but rather a reduction in tax evasion and other politically palatable administrative measures. This may create some friction with the IMF. The spending cutbacks will probably focus on capex with the IMF recommending a reduction in the wage bill and centralizing procurement across ministries and public sector agencies. The lesson learned from Costa Rica is that the IMF has been flexible on accepting a reasonable economic program that the country proposes under a “normal access” lending facility. It is not clear why it would be different for El Salvador.
The debt ratios in El Salvador are higher at 90% of GDP with higher rollover risk in saturated domestic funding markets, but the nominal structural fiscal deficit of 4% of GDP is lower compared to 7% of GDP Costa Rica. The Costa Rica program includes a lengthy phase-in period, bi-annual reviews and gradual adjustment that reverts a 2.6% primary deficit in base year 2019 to a 2.8% of GDP surplus in 2026. The current high debt ratios at 72% of GDP show no improvement through 2026 for the slower pace of adjustment and consistent debt accumulation to finance the high nominal fiscal deficit. It is not clear whether the higher debt ratios in El Salvador will force a revision of the previously discussed 3% of GDP adjustment in 2024.
The one clear difference for El Salvador is that the financing program will depend disproportionately on external funds. The 2021 funding program has an estimated shortfall of around $700 million even after an estimated $450 million IMF disbursement. The saturation in local funding markets suggests either a multilateral loan package that could broaden official lending beyond the IMF, or alternatively renewed access to Eurobond markets. There had already been recurrent whispers earlier this year on potential Eurobond issuance. The context would now be different with stronger investor demand under the anchor of an IMF program and few other attractive high yield alternatives that partly immunize against UST risk. El Salvador at current yields offers the highest carry for an EM credit with an IMF program. Meanwhile, the supply risk should be manageable for a smaller country with smaller gross financing needs (around $2 billion a year). This suggests a tight new issuance premium that perhaps targets the less crowded intermediate sector of the curve and maybe explains the much wider 165 bp z-spread differential ELSAV’32-COSTAR’31 against the 64 bp differential of the ELSALV’23-COSTAR’23.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
