The Big Idea
El Salvador | Risk premium
This material is a Marketing Communication and does not constitute Independent Investment Research.
El Salvador’s bonds are trading more like the broader US high-yield market than a country facing its own policy challenges. Despite the unresolved IMF reviews, tight spreads suggest investors still expect the economic adjustment program to hold. That leaves risks tilted to the upside: a positive IMF headline could push spreads even tighter in an illiquid market, provided fiscal restraint does not undermine growth in the months ahead.
Tight spreads across emerging markets warrant close scrutiny for vulnerability to negative surprises. El Salvador stands out because its spreads remain compressed even as IMF relations are mixed. The IO bonds’ cash price near 4 implies roughly an 85% probability of another stepped-up coupon payment in October if the impasse continues. That is plausible with only three months until the payment, but the bond’s limited liquidity makes it a poor gauge of broader sentiment. A coupon step-up could pressure the wider curve, though effective policy management may continue to anchor credit risk. Investors would likely prefer the IMF program to stay on track, but current valuations also reflect El Salvador’s record of fiscal adjustment, strong growth and commitment to reform.
Our base case is that clarity on IMF relations produces a positive surprise. After two years of negotiations, both sides have incentives to compromise: the IMF could allow pension reform to be announced and implemented after the elections, while El Salvador has already moved to sell the Chivo wallet. An IMF mission would signal a breakthrough toward a staff report and board approval after more than a year of delay since the first review in June 2025. The missed second and third reviews add pressure to realign the program before the fourth review in September and the October IO payment. The timing also overlaps with Moody’s review of its positive outlook on the ‘B3’ rating and leaves scope for similar action by Fitch and S&P on their ‘B-‘ ratings.
The larger prize is a credibility boost that lowers funding costs and attracts long-term foreign investment. Renewed alignment with the IMF, followed by a rating upgrade, could either support today’s tight spreads by reducing market sensitivity or drive spreads lower across the Eurobond curve. Supply-and-demand conditions remain favorable: El Salvador has not issued Eurobonds for an extended period, while investors continue to seek higher-yielding ‘B’-rated debt. A move toward higher ratings could bring valuations closer to less-liquid peers and flatten the curve. We prefer intermediate maturities, which offer lower market sensitivity than the long end, strong carry and upside from bullish curve flattening.
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