El Salvador ministers exit amid post-election transformation

Five of El Salvador's seven cabinet ministers announced their resignation Sunday, amid the ongoing fallout from the March 4 congressional elections, which handed the ruling liberal FMLN party its worst political defeat since its transformation to a political party from an armed guerrilla group a quarter of a century ago.

Though President Salvador Sánchez Cerén of the FMLN continues to hold power – presidential elections are set for February 2019 – the departure of key officials, including finance minister Carlos Cáceres and economy minister Tharsis Salmón López, reflects the most radical changing of the guard at the executive since the party first came to power in 2009.

Cáceres right-hand man Nelson Fuentes was appointed to take over at finance, and Luz Estrella Rodríguez was promoted from deputy minister to take over at economy.

The capture by conservative rival faction ARENA of 38 of 84 seats in the legislature and 12 key mayoral seats casts the FMLN's left-wing priorities into deep uncertainty, particularly as the party fell below 25 legislative seats, less than the 29 minimum needed to veto financing authorization.

Pictured: Ernesto Muyshondt, mayoral candidate for San Salvador, celebrates victory with supporters at the right-wing nationalist republican alliance headquarters in San Salvador, on March 4.

An end to gridlock?

However, Fitch Ratings, in its analysis of the election, sees in the results a much-needed end to the political gridlock that has held El Salvador in sway for years.

"Gains made by El Salvador's main opposition ARENA party in legislative elections could result in an improved policymaking climate and easier passage of debt financing over the medium term," said Fitch. "The outcome of the presidential election in February 2019 will be key. A win by the ARENA candidate would mark the first time in decades the government would not face an opposition party veto in the legislature to authorize debt financing."

The agency sees improved governability as a potential credit positive for El Salvador. It noted that political polarization and legislative gridlock are a key rating sensitivity and credit risk for El Salvador, preventing the passage of reforms and severely constraining government financing options. Legislative dynamics have played a critical role in affecting policymaking, in particular as a two-thirds majority in the legislature is required to authorize external financing.

In the short term, nevertheless, the election result could lead to further gridlock with the presidency and legislature controlled by different parties, already playing out with the major cabinet shuffle.

"Negotiations for 2019 budget legislation may prove particularly difficult and the government may need to have its 2018 financing needs possibly covered by a multilateral bank," said Fitch.

"However, the potential for improved governability could increase should the ARENA party also win next year's presidential election. The timing for this would be critical, as the government's financing needs will jump substantially in 2019 with an US$800mn amortization of a bond coming due in December. If an FMLN or third-party candidate were to win the presidency, then the potential for continued political deadlock would increase," reads the analysis.

El Salvador's significant long-term economic and fiscal challenges raise the pressure for reform, with key credit issues including increasing government debt and low economic growth constrained by structural factors.

"We forecast real GDP growth to remain below 2.5% in 2018 and 2019 while general government debt is likely to continue ticking higher after reaching almost 63% of GDP last year," added the agency. "The country could also face additional economic and fiscal pressures due to the US government's decision to end Temporary Protected Status (TPS) for almost 200,000 Salvadorans living in the US this year."

The TPS is set to end by September 2019. Remittances, largely from the United States, equate to nearly 17% of GDP.

On the positive side, said Fitch, the fiscal deficit has fallen over the last five years, reaching 2.3% of GDP in 2017 from 4% in 2013.

"Furthermore, the passage of pension reform last September will have a positive effect on the fiscal accounts and we forecast the general government primary balance moving into a surplus in 2018 and 2019 of over 1% of GDP as a result," said Fitch.