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El Salvador’s bleak IMF prospects pile on funding pressures

El Salvador President Nayib Bukele speaks during a news conference in San Salvador, El Salvador September 24, 2020. REUTERS/Jose Cabezas

Bond prices stay at distressed levels as concerns over transparency and governance suggest vital IMF programme is distant

While El Salvador president Nayib Bukele celebrates the recent rally in Bitcoin after his government became the first to adopt the cryptocurrency as legal tender in September, analyst and investor concerns are running high over the lack of transparency in the country’s funding and spending plans.

A crucial IMF programme looks further away than ever, and there are now worries about what a possible pension reform may entail.

Finance minister Alejandro Zelaya told investors last week that an announcement over a potential IMF programme could come in November, leading to a slight rebound for El Salvador’s sovereign bonds. The Caa1/B-/B- rated sovereign’s 8.25% 2032s traded up from around 75 cents on the dollar at the start of October to a high of 79 last week, but have since settled at around 77.25, according to MarketAxess.

Graham Stock, partner and head of EM sovereign research at BlueBay Asset Management in London, said that there’s “no evidence” to suggest an IMF announcement is imminent. “All the policy steps are moving in the wrong direction,” Stock told GlobalMarkets.

Bukele’s landslide victory in February’s Congressional elections triggered a storming rally in El Salvador’s bonds as investors realised the president would face no political opposition in implementing an IMF programme.

But the government’s stated desire to clinch IMF funding has not been backed up by actions, as Bukele moved away from orthodox policymaking with the Bitcoin law and the sacking of the Attorney General and five senior judges. He also wants to amend the constitution to allow the extension of presidential terms.

On October 7, a set of civil society groups in El Salvador asked the IMF not to disburse any funds unless the government reinstates the Supreme Court judges that it removed in May.

“Though bond prices have fallen a huge amount to potentially more attractive levels, I just don’t see a catalyst for improved fundamentals,” said Sarah Glendon, senior Latin America analyst at Columbia Threadneedle Investments in New York. “Bukele is not putting much thought into what bond markets think, as he is focussed on gaining power.”

While the adoption of Bitcoin has earned Bukele the adulation of cryptocurrency fanatics across the world and the indirect disapproval of the IMF, this may not be the real obstacle for an IMF deal.

“The constitutional changes and Bitcoin implementation are not deal-breakers for me,” said Stock at BlueBay. “What is required for an IMF programme is not insurmountable. It’s mostly about transparency and good governance, and ensuring that spending decisions are made in a sensible fashion — not at the whim of the president.”

While investors say El Salvador has enough funding to muddle through 2021, next year is likely to be a challenge, with Amherst Pierpont Securities estimating last week that the funding shortfall in 2022 could reach $2.6bn without multilateral finance. Given limited hopes for El Salvador’s IMF deal, this may force the government towards unconventional financing. “The next looming risk is the so-called pension reform, but there has been very little information conveyed,” said Glendon. “Some people are expecting a full nationalisation of the pension system.”