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El Salvador faces risk of sovereign debt default

Thursday, December 8, 2022

Significance

High fiscal financing needs and an USD800mn external bond maturity in January 2023 increase the risk of default given the country’s limited access to financial markets. According to the Emerging Markets Bond Index (EMBI), El Salvador now has the second-worst level in Latin America; only Venezuela has a higher bond yield.

Impacts

  • Dollarisation reduces the likelihood of a currency crisis or devaluation-induced increase in debt ratios.
  • Corruption and bribery risks and a lack of transparency in government accounts will discourage foreign investment.
  • Bukele will probably win re-election in 2024, raising further doubts about the strength of democracy and rule of law.

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