The Big Idea
El Salvador | No longer distressed
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.
Spreads on El Salvador’s longer debt have now quietly slipped below 1,000 bp, the usual threshold of distress. The stealth outperformance is probably based more on technicals than fundamentals, with strong investor interest in high carry. El Salvador has been a clear relative value this year but now reaches a mature phase of recovery. Appetite for carry may still push prices marginally higher, especially with illiquid secondary markets sensitive to investors covering underweight positions. But solvency is still an issue based on low growth prospects and a harder phase of fiscal consolidation. This leaves the country’s bond prices increasingly vulnerable to downside.
Near-term price stability reinforces the carry trade. The country’s liquidity remains manageable despite slowing revenues with incremental cash following pension reform and fiscal restraint. Flat revenues translate into flat spending for the first half of the year. Lower transfers offset continuing high debt service. There is some budget flexibility with a political agenda that allows for lower regional transfers after the recent municipality re-zoning and strategically ahead of the elections. Debt service remains a priority, with debt buybacks last year showing commitment to pay and a smoother debt repayment profile through 2025. This perpetuates the muddling-through carry trade for now. But there is still high uncertainty around longer-term debt payments.
The fiscal accounts have reached a slower and more difficult phase of adjustment. The latest data for the first half of the year shows a similar performance to last year and a clear reversion from the pronounced deficits in 2020 and 2021. However, the latest data show somewhat of a plateau with a 12-month rolling deficit of $592 million through June and mostly unchanged against December last year. This slowdown of fiscal consolidation could represent a logical pause to avoid pro-cyclical adjustment ahead of the elections next year. The Bukele administration probably doesn’t want to undermine the slow recovery in economic activity at an average rate of 3.7% year-over-year in May through June after 2.3% year-over-year from January through March.
Workers’ remittances remain resilient; however, the breakdown of the balance of payments flows are not ideal for trend growth. The current account deficit and import consumption was financed last year with lower reserve requirements (foreign exchange reserve loss), other investments (multilateral loans, trade financing and so on) and errors and omissions. These funding sources are increasingly scarce, especially as foreign exchange reserve requirements reach historic lows. If there are no excess dollars to fund consumption, then growth prospects could remain suboptimal at 2% GDP or lower. There has been a recent pickup in tourism inflows and information technology services but nothing transformational. There is clear vulnerability to external trends that would only exasperate pro-cyclical fiscal austerity. The recent tighter credit spreads also do not yet open capital markets. Yields remain in the 12% to 14% range with estranged relations with the International Monetary Fund and restricted access to multilateral loans.
There is still political flexibility under the autocracy of the Bukele administration and high approval ratings heading into the election cycle. Low near-term debt payments allow for a slower phase of fiscal consolidation especially under the budget flexibility of municipality transfer cutbacks and the financing flexibility of pension reform. The muddling-through on low liquidity risks may support a tactical carry trade near-term; however, its increasingly difficult to rationalize much higher bonds prices under a scenario of paying for longer beyond 2027.
There are large Eurobond amortizations in 2027 with still no medium-term debt repayment plan. There is (yet) no virtuous circle that validates much higher bond prices. Instead, there is the same low conviction on a medium-term debt repayment under low 2% trend GDP growth, low financing alternatives and a fiscal deficit of 2% of GDP. This logically only validates near-term carry returns with current bond prices facing increasing resistance at higher levels for still unresolved solvency risks.
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.
