From a report by Fitch Ratings:



Fitch Ratings-New York-10 April 2017: Fitch Ratings has downgraded El Salvador's Long-term (LT) Local Currency Issuer Default Rating (IDR) to 'RD' (Restricted Default) from 'B'/Negative. Fitch has also downgraded El Salvador's LT Foreign Currency IDR to 'CCC' from 'B'/Negative. El Salvador's senior unsecured foreign currency bonds are downgraded to 'CCC' from 'B'. The LT Local and Foreign Currency IDRs do not have an Outlook. The Country Ceiling is downgraded to 'B-' from 'BB-' and the Short-Term Local and Foreign Currency IDRs are downgraded to 'C' from 'B'.



KEY RATING DRIVERS



The downgrade of El Salvador's LT Local-Currency IDR to 'RD' reflects the following key rating drivers:



According to the statement made by El Salvador's Ministry of Finance dated April 7, 2017, the government failed to make interest payments on debt to the local private pension funds issued under domestic law, Certificados de Inversion Previsional (CIPs). In line with its criteria, Fitch therefore judges El Salvador to be in default on its sovereign obligations. The amounts due April 7-10, 2017 total $28.8 million. This credit event follows a period of heightened political polarization in El Salvador that has resulted in a prolonged period of congressional gridlock, has hindered meaningful fiscal measures to arrest the deterioration of public finances, and has severely limited the government's financing options.



The performing LT Foreign Currency bonds have been downgraded to 'CCC' from 'B'. The intensified political polarization could make it difficult for the government to secure approval for additional long-term external borrowing that is needed to bridge the financing needs for 2017, highlighting the increased risks for default. The government issued USD601 million in February out of USD1.2 billion projected total financing needs for 2017 (excluding CIP amortizations). A two-thirds majority in congress is needed to get approval for long-term borrowing, which has been difficult to get given the strong opposition the government faces from Arena (the main opposition party).



CRITERIA VARIATION

Fitch has adjusted the application of its Sovereign rating criteria to address the specific situation that El Salvador is an officially dollarized currency regime and the government defaulted on instruments that are issued under local law. Fitch believes that the distinction in this case applies to the jurisdiction of the applicable laws relating to the debt issuance and has made a distinction between the Local Currency IDRs and the Foreign Currency IDRs.



RATING SENSITIVITIES

The curing of the default through resumption of debt service payments would lead to an upgrade of the LT Local Currency IDR. At such time, Fitch would review the ratings of El Salvador and place them at a level consistent with the sovereign's ability and willingness to service debt.

More on this topic

Fitch Ratings has raised the Salvadoran debt rating to CCC, but warned that political polarization could continue to affect the approval of new long-term loans.



The decision to raise the IDR risk rating in local currency was taken by Fitch Ratings after the government paid interest on Pension Funds Certificates (CIPs) to private pension funds on April 28.

Fitch Ratings has maintained its BB-rating but noted prevailing structural weaknesses such as low competitiveness, crime, weak human capital and the high cost of energy.



From a press release issued by Fitch Ratings:



Fitch Ratings has affirmed the long-term long-term debt rating in both dollars and local currency at 'BB-'.

Fitch Ratings has downgraded the economic perspective of the rating, making it negative outlook BB.



From the press release by Fitch Ratings:



Fitch Ratings - New York - July 24, 2012: Fitch Ratings affirms its ratings for El Salvador as follows:

- Long-Term Ratings (IDR) in foreign currency and local currency 'BB';

Fitch downgraded Mexico's Issuer Default Rating (IDR) from 'BBB+' to 'BBB' in foreign currency and from 'A-' to 'BBB+' in domestic currency.



Both ratings have a 'Stable' outlook. Additionally, the country's ceiling was reduced to 'A-' from 'A'.



Fitch downgraded Mexico's ratings because the country's fiscal situation has gotten worse with the financial crisis and a reduction in Mexican oil production.