LatinNews Daily - 05 May 2022

In brief: Moody’s downgrades El Salvador

*International credit ratings agency Moody’s has downgraded the Salvadorean government's long-term foreign-currency issuer rating and long-term foreign-currency senior unsecured debt ratings to Caa3 from Caa1. The outlook is negative. Moody’s said its decision “reflects an increased probability of a credit event – restructuring, distressed exchange, or default – with relatively high severity, as the sovereign faces a challenging debt amortisation schedule with bond maturities in 2023 and 2025 in a context of continued funding stress and persistently high financing needs”.  Concurrently, Moody's lowered El Salvador's foreign-currency country ceiling to Caa1 from B2 “to reflect the low predictability of institutions and government policies, weak policy effectiveness and the government's relatively large share in the country's total external debt”. According to Moody’s, El Salvador's repayment capacity is compromised by an “extremely high cost of funding ahead of a challenging debt amortisation schedule that includes bond maturities of US$800m in January 2023 and again in January 2025. High yields on the sovereign's outstanding external market debt, with sovereign spreads in excess of 2,200 basis points, and reliance on costly short-term domestic debt have led to a material increase in credit risks”. Moody's estimates indicate that El Salvador will likely face a funding gap of about 1% of GDP this year as the government moves to cover financing needs equivalent to 16.2% of GDP.

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