El Salvador’s sovereign debt saw a notable increase on Monday after President Nayib Bukele announced that the 2025 budget will not include the issuance of new debt. This move is seen as a crucial step towards fiscal austerity and could unlock a long-awaited deal 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 several maturities. Bonds due in 2035 rose by 2.2 cents, reaching 80.5 cents on the dollar, the highest level since 2021. The yield on these bonds fell sharply more than 40 basis points to 10.7%.
President Bukele has committed to presenting next year’s budget before September 30. This announcement comes after a period of poor performance in the debt market, driven by investor concerns about the government’s ability to meet its obligations and the lack of an agreement with the IMF. The IMF has cited insufficient fiscal consolidation and the adoption of Bitcoin as an official currency as the main reasons for the delay.
Carlos de Sousa, emerging markets debt portfolio manager at Vontobel Asset Management, said that while the commitment is somewhat vague, it signals a possible shift toward fiscal responsibility. “There has been a fiscal and economic deterioration over the last year, but the promise suggests that, at least fiscally, they will 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 at the bank believe a deal with the IMF is closer than ever, noting that Bukele’s softer stance on Bitcoin could help resolve long-standing issues that have hampered negotiations.
Despite these positive developments, the agreement with the IMF is not yet finalized. Investors remain cautious, awaiting more details on the government’s plans to address the fiscal deficit, which stood at 2.5% of GDP as of July. Concerns about Bitcoin’s role as legal tender continue to pose challenges.
Bloomberg’s analysis highlights that, although the promise of fiscal austerity has increased confidence in El Salvador’s debt market, the ultimate success of negotiations with the IMF remains uncertain.
