The Big Idea
El Salvador | So close
This material is a Marketing Communication and does not constitute Independent Investment Research.
El Salvador has ambitious fiscal targets this year, part of a lengthy process of stabilizing the country’s debt ratios. The stakes are high after spending accelerated in April and May. June showed an impressive primary surplus, but cumulative results for the first half of the year still fall just shy of the IMF target. This raises the possibility of a program waiver since the deviation is small and comes in the context of strong US diplomatic support and a track record of IMF program commitment. That leaves current valuations likely relatively immune to disappointment since El Salvador has lagged other market-sensitive credits lately and external risk continues to support high yielders.
El Salvador’s tax data shows current revenues slightly above budget in the first half of this year and expanding at a 7.8% year-over-year. This is impressive considering the economic deceleration at 2.0% year-over-year during January through April 2025, below the projected 2.5% year-over-year assumption.
It is the spending side that remains the threat after the surge in April and May. This put pressure on June to compensate for the much lower than expected primary fiscal surplus in April and May. The fiscal accounts cyclically do not show a huge primary surplus in June sufficient to bridge the gap for the target through the first half. The January-to-May primary surplus of $256 million needed to reach $530 million with the June 2025 data. The June data revealed an impressive primary surplus of $191 million with a 15% year-over-year contraction in spending that reflects slowing transfers and a 40% year-over-year contraction in capital expenditures.
The overall June fiscal data clearly show the huge effort to meet the IMF fiscal target, though at a cumulative primary surplus of $447 million is shy of the $530 million target. There should be some flexibility from the IMF, especially if there is an easy explanation of non-recurring spending such as arrears payments in April and May and in light of June efforts to contract spending. The willingness to cutback capital expenses in June shows political commitment to put the IMF ahead of important public capital projects. There is also goodwill after a track record of fiscal discipline through 2024 and the success of broader program targets including pre-emptive measures after lengthy IMF negotiations. The IMF balance sheet exposure is also quite low under normal loan as opposed to exceptional access loans while good US relations may cross over to support from the IMF board.
The prospect of an IMF waiver on the fiscal targets may not dramatically improve sentiment sentiment, but it at least reaffirms IMF support. The timing is also opportune considering the risk-on sentiment that may encourages investors to shrug off any negative headlines. There has been no obvious market reaction to the weak fiscal data in April and May and arguably the June data was a huge improvement. Relative valuations remain attractive with El Salvador still one of the higher yielding ‘B’ credits and lagging the performance lower yielding credits like Colombia.
El Salvador did not benefit from the risk-on sentiment of the past few weeks. The ELSALV’32-COLOM’32 differential has widened towards the high end of the 70 bp to 100 bp trading range, contrary to the spread compression across other high yield credits. This should provide a buffer against any disappointments. This is the motivation for the virtuous circle of attracting foreign direct investment for higher trend GDP growth. The successful IMF program provides a vote of confidence for attracting long-term productive capital. The Bukele administration also just launched a new initiative similar to Argentina with a special tax regime to lure foreign direct investment. Rating upgrades and spread compression still depend on the consistent fiscal consolidation and higher growth necessary for debt sustainability.
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