The Big Idea
El Salvador | IMF board approval
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The IMF board’s timely October 1 approval of El Salvador’s program avoids a step-up coupon on the 2030 IO bond, generating cash flow savings. More importantly, it signals a commitment to the program’s more difficult next phase, including controversial pension reform and a mature stage of fiscal adjustment. The Bukele administration’s strong governing position should reduce execution risk. This points to gradual credit rating upgrades and tighter credit, with the high-yielding, low-beta credit outperforming during last month’s US Treasury weakness and risk-off sentiment.
Investors should closely watch the IMF staff report, the first since the July 2025 review, for updated targets and guidance on tracking compliance. The IMF board’s review summary contained no surprises. Bitcoin donations required a program waiver “based on strong corrective measures and renewed commitments,” while additional regulations and transparency measures will probably become structural benchmarks. The review also cited pension reform as a benchmark: “Pension and civil service reforms will be pursued to support fiscal consolidation goals.” The fiscal path appeared unchanged, with the primary balance projected to reach 3.7% of GDP in 2027. The forecast assumes strong 4% GDP growth, with higher structural revenue providing most of the adjustment.
The program centers on growth-friendly fiscal consolidation through strong revenue, restrained current spending and continued high capital expenditures. Public investment remains elevated because of efforts to expand technology in telehealth and education. Strong early PISA scores help explain education spending equal to 8% of GDP in the 2027 budget. Excess liquidity from above-trend worker remittances in 2025 continues to support above-trend growth, projected at 4.5% this year. The higher cyclical and structural tax revenues continue to deliver double-digit paced growth through YTD August 2026. The official breakdown suggests 60% structural and 40% cyclical revenues with maximum gains of 2% of GDP of additional revenues related to technology-related efficiency gains. The IMF assumes higher tax revenues from 21.9% in 2025 to 22.9% in 2027. The next challenge is another 1% of GDP in fiscal consolidation, lifting the nonfinancial public sector primary surplus from 1.9% of GDP in 2025 to 2.9% in 2026.
The IMF program releases a $138 million tranche, but gross funding needs remain high and depend on multilateral financing and a return to markets next year. Investors should watch for revisions to the financing mix because the sovereign has not issued Eurobonds since 2024. The first review projected relatively small issuance of $600 million in 2027, rising to $1.2 billion in 2029, with net issuance remaining modest. That would reinforce favorable supply-demand technicals, which could improve further if ratings are upgraded. IMF approval could trigger a one-notch upgrade to B from B- across the rating agencies. Moody’s may move first after assigning a positive outlook to its B3 rating in February 2026.
A path to the BB rating category could emerge as governance and social indicators improve. Reaching investment grade will take longer and require reducing the debt burden, now equal to 90% of GDP, through 4% to 5% growth and a primary fiscal surplus of 3.7% of GDP. That combination will depend on stronger foreign direct investment in strategic sectors such as tourism. The latest balance-of-payments data through the second quarter of 2026 do not yet show a trend shift. But leading indicators are encouraging, including a sharp increase in company registrations after regulatory modernization and digitization, as well as greater port activity under more efficient management. The vote of confidence from the IMF program and commitment to program execution over the next two years should encourage the transition to higher foreign direct investment and a structural shift to higher GDP growth.
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