S&P Global Ratings on Oct. 3 raised El Salvador's long-term foreign- and local-currency credit ratings to CCC+ from Selective Default, or SD, its short-term ratings to C from Selective Default, or SD, and the issue-level rating on its foreign-currency senior unsecured debt to CCC+ from CCC. The outlook was stable.
The ratings action followed the restructuring Certificates for Pension Investments, or CIPs, the amendments of which took effect within the five working days specified in a bill approved Sept. 28.
The agency had lowered the sovereign ratings to Selective Default on Oct. 2 because it characterized that restructuring as a "distressed exchange."
The Oct. 3 rating move reflected S&P's belief that the restructuring will alleviate the government's structural deficit and reduce its short-term financing needs. However, it said that the government still faces the challenge of reaching further agreements on fiscal policy, its high debt burden and limited economic growth prospects.
The restructuring included an extension of the CIPs' term to 30 years from 25 years, a three- to five-year grace period for capital payments and modified interest rates to between 2.5% and 4.0% from between 3.5% and 5.5%. Beginning in 2022, interests rates will be modified to 4.5%.
The annual shortfall of the pension system is about 1.5% of GDP, compared to 2% before the CIPs' restructuring, and pension-related debt constitutes about 25% of total general government debt, according to the agency.
"El Salvador is currently vulnerable and depends on favorable financial and economic conditions to meet its financial obligations, though we do not expect a near-term payment crisis," S&P said.
Meanwhile, the agency affirmed its transfer and convertibility assessment at AAA, citing its view that the sovereign will continue to use the U.S dollar as its currency and not restrict dollar outflows by private parties to make debt-service payments.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.