The Big Idea
El Salvador | Managing finances
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.
El Salvador’s fiscal trends remain important for the country’s finances. The first half of 2024 shows some spending restraint and strong tax collection. But this is not yet transformational since pension debt continues to accumulate. Eurobond investors await clarity on either International Monetary Fund support or unilateral fiscal adjustment. Clarity is a prerequisite to open capital markets. Despite the gradual fiscal adjustment, there is strong commitment to pay and room for optimism.
The underlying trends for the first half of 2024 look good for El Salvador with strong tax collection and lower payrolls. Tax collection accelerated 10% year-over-year compared to flat performance year-over-year in the first half of 2023. The momentum on collection efficiency has been impressive with technological innovation—electronic invoicing—as well as threat of penalty against tax evasion. This impressive trend would raise annual tax collection from 19.8% of GDP in 2023 to 20.5% of GDP in 2024. However, the recent data on monthly economic activity has been worrisome with a pronounced slowdown from February through May 2024. This runs contrary to optimistic projections of 4% GDP growth this year. The last few months have run at nearly a flat annual pace. The primary drag on economic activity has been the deceleration in construction from double-digit growth in 2023. There has also been a broad-based slowdown across industry, public administration and professional activities. This may shift the adjustment burden to more aggressive budget cutbacks.
There is still room for more cuts in spending, specifically across wages and transfers. The spike in severance payments through April has quickly decelerated in May and June. Lower payrolls should provide some savings in the second half of 2024. There hasn’t been any relief on transfers with 10% year-over-year growth in the first half of 2024 compared to no year-over-year growth a year ago. The transfers represented 6.7% of GDP in 2023 against 5% of GDP in 2019. There is also considerable flexibility on reducing wages at near 7% of GDP against the regional average closer to 5.5% of GDP. If the International Monetary Fund recommends 3% of GDP in cumulative fiscal adjustment and El Salvador wants to avoid tax hikes, then this should shift the majority of the burden to spending cutbacks. The pace of spending restraint remains gradual and logically a function of the financing capacity.
The latest headlines for authorization of external issuance is curious. Yields above 11% wouldn’t suggest market access with investors awaiting for clarity on the macro tests of the $1 billion Eurobond issued earlier this year. The funding sources continue to rely on the pension funds as per the steady accumulation of pension debt. There is no data transparency to assess the liquidity of the pension funds and their financing capacity. However, it’s logical to assume declining flexibility at a mature phase of financing stress. This should ultimately force a more aggressive rationalization to reduce the gross funding needs either unilaterally or through a formal IMF program. The economic slowdown could accelerate a sooner rationalization of the fiscal accounts.
El Salvador has posted back-to-back outperformance with 3.3% emerging markets index returns in July after 1.4% returns in June. The momentum has logically subsided; however, the risk-on sentiment should favor the high yielders with potential for lower volatility and capital gains on latent positive event risks. The scarce financing, economic slowdown and commitment to pay should eventually force a reassessment on policy management and a commitment to a fiscal anchor. The willingness to pay should eventually reconcile the ability to pay.
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 © 2024 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.
