El Salvador's fiscal mess
The government of El Salvador is failing to get its financial house in order, and that failure is having significant repercussions. The government failed to make payments on certain pension related debt last week, and this prompted major downgrades from all the global credit rating agencies. As S&P explains, the problem is political stalemate:
El Salvador's Congress recently failed to approve a budgetary allocation that was needed to cover payment of financial commitments for pension-related debt. As a result, the government missed payments on financial obligations coming from the Certificates for Pension Investments (CIPs) due between April 7 and April 10, 2017, adding up to $28.8 million....
Political polarization has heightened over the last year, resulting in an uncertain policy environment, including diminished willingness and capability to maintain timely debt payments. This deteriorating political environment continues to erode El Salvador's credit quality. The government's budget for 2017, which was passed earlier this year, did not contain any allocations for servicing the CIP debt, due in part to political brinksmanship between the governing Frente Farabundo Marti para la Liberacion Nacional (FMLN) and the opposition Alianza Republicana Nacionalista (ARENA). The political stalemate between the FMLN and ARENA diminishes the likelihood of a new agreement on fiscal policy, including reforms to the pension system, before Congressional elections scheduled for March of next year.
Pension-related obligations have weighed largely on El Salvador's fiscal and debt assessments and therefore on El Salvador's rating history since Congress implemented pension reform in 1998. The annual shortfall of the pension system is about 2% of GDP, and pension-related debt represents about 25% of total general government debt. Pension-related financial obligations are issued through a Pension Trust established in 2006 and managed by the National Development Bank (BANDESAL). The Pension Trust makes debt payments to holders of CIPs through transfers from El Salvador's Ministry of Finance.