El Salvador’s sovereign debt saw a significant uptick on Monday following President Nayib Bukele’s announcement that the 2025 budget will not involve issuing new debt. This move is anticipated to be a crucial step towards fiscal austerity and could unlock a long-awaited agreement with the International Monetary Fund (IMF), according to Bloomberg.
In response to Bukele’s announcement, the value of El Salvador’s dollar-denominated bonds rose across various maturities. Bonds maturing in 2035 increased by 2.2 cents to reach 80.5 cents on the dollar, the highest level since 2021. The yield on these bonds fell sharply by over 40 basis points to 10.7%.
President Bukele has pledged to present the next year’s budget by September 30. This announcement follows a period of poor performance in the debt market, driven by investor concerns over the government’s ability to meet its obligations and the lack of an IMF deal. The IMF has cited insufficient fiscal consolidation and the adoption of Bitcoin as an official currency as key reasons for the delay.
Carlos de Sousa, an emerging market debt portfolio manager at Vontobel Asset Management, commented that while the pledge is somewhat vague, it indicates a potential shift towards fiscal responsibility. “There’s been some fiscal and economic deterioration over the last year, but the promise suggests that on the fiscal side at least they’ll move in the right direction,” he said.
Bank of America has upgraded El Salvador’s debt to an overweight position following a recent investor trip to the country. Analysts from the bank believe that an agreement with the IMF is now closer than ever, noting that Bukele’s softer stance on Bitcoin could help resolve long-standing issues that have impeded negotiations.
Despite these positive developments, the IMF agreement is not yet finalized. Investors remain cautious, awaiting further details on the government’s plans to address the fiscal deficit, which stood at 2.5% of GDP through July. Concerns over Bitcoin’s role as legal tender continue to pose challenges.
Bloomberg’s analysis highlights that while the fiscal austerity pledge has boosted confidence in El Salvador’s debt market, the ultimate success of the IMF negotiations remains uncertain.
