Default likely in El Salvador, but only after the 2024 election

We expect El Salvador to avoid default in 2023, but unsustainable public debt and dangerously low reserves will trigger restructuring before 2026. Fitch recently downgraded El Salvador sovereign debt to CC, and 2025 bonds trade at 55 cents to the dollar.

What you will learn:

• The fiscal improvement from 2021’s massive 8% of GDP deficit will be insufficient. With the country running a current account deficit of 9% of GDP, we forecast USD reserves will fall by US$1bn to a dismal US$1.6bn this year (about one month of imports), and US$1.8bn in 2023.
• Having lost market access, the timing of default will depend on when forex reserves run out, which in turn depends on the degree of import compression. In our baseline, reserves would be wiped out were the government to repay the 2025 Eurobond amortisation (Chart 1).
• In our view, the buybacks are little more than a boondoggle, buying time for the government to procrastinate while allowing bondholders to profit.