Caribbean & Central America - December 2015 (ISSN 1741-4458)

On 19 November, the credit rating agency Moody’s changed the outlook on El Salvador’s Ba3 rating from stable to negative. Moody’s justified its revision on the grounds of “the limited ability of the authorities to arrest the upward trend in government debt amid persistently high fiscal deficits and low economic growth”.

Moody’s argued that debt ratios had “increased steadily since 2009 driven by persistent fiscal deficits of around 4% of GDP”. This presented the opposition with the opportunity to accuse the ruling left-wing Frente Farabundo Martí para la Liberación Nacional (FMLN), which took power that year, of profligacy.

Moody’s reasoned that with GDP growth averaging just 1.9% over the last 10 years, the only way the fiscal deficit could be reduced would be through the implementation of “aggressive fiscal consolidation, or revenue enhancing measures”, something which is “particularly difficult” given the gridlock in the 84-seat legislative assembly.

Moody’s predicted that the government would undertake a significant pension reform “in the next 3 to 6 months” in order to address the fact that “pension expenditures represent roughly half of the fiscal deficit and have increased debt by more than 10 percentage points since the system was privatized in 1998”.