El Salvador Payment to Clear First 2023 Hurdle for Distressed Emerging Markets

The Central American nation is widely expected to repay creditors on Tuesday after receiving a last-minute loan and undertaking two bond buybacks

Vendors at a local market in San Salvador.
By Sydney Maki and Zijia Song
January 23, 2023 | 09:36 AM

Bloomberg — El Salvador’s Bitcoin-touting government is poised to deliver on a $604 million bond maturing this week, in a turn of events that leaves investors in distressed emerging-market debt with only one more big maturity to worry about this year.

The Central American nation is widely expected to repay creditors on Tuesday after receiving a last-minute loan and undertaking two bond buybacks. The maturing note, which now hovers at about a penny below par, has soared by a whopping 34 cents from an all-time low in July.

“They have managed to probably scrape together enough resources from cash reserves and multilateral lending to be able to make that bond payment,” said Sarah Glendon, a senior analyst at Columbia Threadneedle Investments in New York.


Optimism that El Salvador’s president, Nayib Bukele, will stave off default has helped its dollar debt, on average, to rally roughly 24% this year. That’s the best performance of any emerging economy tracked in a key Bloomberg index so far in 2023.


A $450 million loan the country acquired this month from a regional multilateral, the Central American Bank for Economic Integration, may have helped seal the deal.

The successful bond repayment alone won’t alleviate all of Wall Street’s concerns. Investors have been burned by the symbolic firing of several top judges, the nation’s risky bets on Bitcoin and the lack of a deal with the International Monetary Fund. Plus, Bukele is gearing up for a controversial re-election bid in 2024.

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Money managers still demand more than 14 percentage points of extra yield over US Treasuries to hold the nation’s dollar bonds, according to JPMorgan Chase & Co. data, well above the threshold for distress. Credit-default swaps, meantime, flash an 80% chance of default by 2027.


But El Salvador’s next major bond maturity isn’t until 2025. That leaves investors to focus in on other pockets of risk in the meantime — like Tunisia, which is the only other non-defaulted, distressed emerging market with a major foreign, hard-currency bond maturing this year.

The North African nation is on the hook for a €500 million note set to mature in October, though Fitch Ratings forecast last month that a combination of IMF aid and funding from other sources will cover the government’s funding gap.

Bullish EM

Across emerging markets more broadly, the outlook is bullish. A chorus on Wall Street expects the asset class to outperform this year as major central banks lay off their aggressive rate-hiking cycles, inflation cools and China’s reopening spurs economic activity.


“Some frontier markets are concerning, but at the bigger market level, foreign ownership of debt has come down because more debt has been issued locally and bought by domestic investors. I see less risk compared to the past,” said Jitania Kandhari, a money manager at Morgan Stanley Investment Management. “I am less concerned about fiscal issues that worked against emerging market asset class in 1980s, 1990s.”


In smaller and more vulnerable emerging and frontier markets, risk can balloon quickly. There are still 15 nations with bond yields that trade at an excess of 10 percentage points over US Treasuries, the threshold for debt to be considered distressed and at a higher risk of default.

Pakistan is at especially high risk of defaulting in 2023, especially if the country’s IMF program goes off track, according to Aviva Investors. While the nation has no major foreign bond maturities this year, it does have interest payments due as soon as March.

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“Whether or not the same fate befalls other nations will depend on the pace at which they can grow their economies and regain access to financial markets,” Aviva Investors money managers and analysts including Aaron Grehan wrote in a note.


What to Watch

  • Traders will monitor Singapore’s inflation for signs that headline price pressure abated in December
  • Bank of Thailand on Wednesday is expected to lift its benchmark interest rate by 25 basis points to 1.5%, according to economists surveyed by Bloomberg
  • Hungary’s central bank is scheduled to announce its base rate on Tuesday
  • The monetary authority in Sri Lanka is forecast to keep their key rate on hold, even with inflation running around 57%
  • Brazil’s mid-January inflation reading is expected to help investors set expectations ahead of the nation’s February central bank meeting
  • Argentina economic activity may have declined slightly in November, underscoring a weak economy as the impulse from fiscal and monetary policy fades, according to Bloomberg Intelligence

--With assistance from Selcuk Gokoluk

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