El Salvador’s sovereign debt surged on Monday following an announcement by President Nayib Bukele that the 2025 budget would not include any new debt issuance, according to a report by Zijia Song and Vinícius Andrade for Bloomberg. This move signals a shift towards fiscal austerity and could be a pivotal step in securing a long-awaited deal with the International Monetary Fund (IMF). Bloomberg reported that the country’s dollar bonds due in 2035 saw a notable rise of 2.2 cents on the dollar, reaching their highest level since 2021.
Bloomberg highlighted that Bukele’s plan to present the 2025 budget by the end of September comes at a critical time, as El Salvador has struggled to meet its financial obligations. Investor confidence had waned earlier this year due to the lack of progress on securing an IMF deal, an agreement that had been delayed by concerns over the country’s fiscal policies and its adoption of Bitcoin as legal tender. Bloomberg added that the IMF has been cautious, citing these factors as major obstacles in their negotiations.
Carlos de Sousa, a portfolio manager at Vontobel Asset Management, told Bloomberg that while the government’s fiscal position has deteriorated over the past year, the promise of no new debt is seen as a positive step. Sousa referred to the announcement as a vague yet important move towards reducing the fiscal deficit, with Bloomberg describing it as potentially signaling an era of fiscal responsibility for the nation.
In its coverage, Bloomberg noted that Bank of America upgraded El Salvador’s sovereign debt from market weight to overweight following an investor trip to the country. The analysts, including Lucas Martin and Jane Brauer, noted that the government appears to be closer to finalizing a deal with the IMF than ever before. According to Bloomberg, this optimism was shared by other investors, including HSBC’s Nathalie Marshik, who mentioned that even the controversial issue of Bitcoin could be softened to advance the negotiations.
However, Bloomberg cautioned that not all investors are convinced. Arif Joshi, a co-head of emerging market debt at Lazard Asset Management, expressed skepticism to Bloomberg about the timeline for any agreement. He emphasized the importance of seeing concrete progress rather than promises.
Even though the pledge of a balanced budget is promising, Bloomberg quoted Jared Lou, a portfolio manager at William Blair, who said that the biggest hurdle to finalizing the IMF deal remains the issue of Bitcoin as legal tender in El Salvador. Many investors are closely watching how the government will navigate this challenge and trim the fiscal deficit, which stood at 2.5% of the nation’s gross domestic product as of July 2024.
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