The Big Idea
El Salvador | Technical support
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There has been a clear shift in market technicals for El Salvador. The stock of Eurobonds outstanding is a mere $5.8 billion. This now represents the lowest stock of Eurobond debt in the region next to the Bahamas. There is also low rollover risk after the country’s aggressive buyback of the shortest tenors with $100 million remaining on the 2025s and $387 million on the 2027s. Reduced liquidity risk and advanced negotiations with the International Monetary Fund have improved prospects for lower yields and encouraged good demand for the country’s new 30-year debt.
The latest liquidity relief creates somewhat of a virtuous circle of low financing risks and strong commitment to pay that should sustain low yields. This also assumes that Eurobond issuance should allow for new financing that fully funds the stump payment next January. This breathing room on liquidity may reinforce low beta carry returns and offer diversification into the uncertainty of external risks. It’s also worth remembering that smaller countries benefit from lower gross financing needs that allows for a more financing flexibility.
The domestic approval of $1 billion of debt issuance allows for launch of Eurobond issuance of a longer dated 30-year benchmark that should price tight to the 2052s. It’s difficult to expect another large successive buyback after the $1 billion taken out last month against total tender offers of $1.76 billion. There is also only a small $2.6 billion stock of eligible bonds and small tranches except the newly issued 2030. El Salvador is also offering only a relatively small buyback premium except the 2027s. This would suggest a combination of debt liability and new financing component.
The rollover relief is only temporary and doesn’t resolve the cash flow imbalance on the fiscal accounts and the insolvency risks of a large debt stock. The high funding rate of more than 9% is also not ideal for debt dynamics. The sustainability of normalized yields still requires progress on the fiscal deficit and follow-through on the zero fiscal deficit (excluding capex). The Bukele administration presented an austere 2025 budget under the premise of a balanced budget for current spending and multilateral debt to cover capex spending. The headline fiscal data through September 2024 continue to deteriorate, with a declining primary surplus (excluding pensions). However, the underlying data reflect encouraging trends including a deceleration in capex and wages and robust tax collection. These trends should have to accelerate into next year to provide confidence for lower gross financing needs.
The prospects for new issuance should also decline if the economic team follows through on their promise for a zero fiscal deficit for next year that reinforces continuing supportive technicals. The IMF program is still the base case scenario at an advanced stage of negotiations. The participation of the IMF on the investor calls provides reassurance of close if not final stage of negotiations. The IMF program still remains the best option of an immediate credibility shock of lower yields and access to concessional funds. There hasn’t yet been confirmation on a BTC compromise; however it seems a practical solution can be found since BTC isn’t integral to the economy. This optimism of advanced IMF negotiations and proactive debt liability should reassure still supportive technicals with prospects for still lower bond yields and strong demand for new 30-year debt.
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