In the framework of its regular review of short-term (ST) political risk classifications, Credendo has downgraded four countries (North Cyprus, El Salvador, Guatemala and Paraguay).
Guatemala: downgrade from 2/7 to 3/7
Private transfer inflows (typically accounting for about 40% of current account receipts) have been falling in 2020. These private transfers primarily come from remittances from the USA. They have been shrinking in the past months as the labour market and economic growth worsened in the USA. As a result, a small current account deficit of at least 0.5% of GDP is in the cards for 2020 (coming from a surplus of 2.4% of GDP in the end of 2019). This marks an unprecedented deterioration in Guatemala’s external position year-on-year since 1992. Last June, Guatemala stepped to the IMF and secured an emergency financial assistance of about USD 594 million to help to meet the urgent balance of payments needs. As a result, its foreign exchange reserves rose to a relatively high level (covering 9 months of imports in June). That being said, foreign exchange reserves are likely to decline in the coming months, as these will be used to fill the balance of payment financing gap. Furthermore, Guatemala´s short-term external debt sharply increased to elevated levels in March 2020, further negatively impacting the country’s liquidity position. Lastly, the projection of the current account deficit of this year is likely to be revised downwards in the coming months, further pressurising foreign exchange reserves and (short-term) external debt. Indeed, exports to the USA (33% of total goods exports) and remittances inflows are likely to deteriorate as lockdown reopenings have been rolled back across US states during the summer since the covid-19 pandemic seems difficult to control. For these reasons, Credendo has downgraded its short-term political risk classification to category 3/7.
El Salvador: downgrade from 3/7 to 4/7
The current account balance of El Salvador – a dollarised economy - is expected to widen significantly from -2.1 % of GDP in 2019 to -4.1% of GDP in 2020. The main reason is the slowdown in the US economy, which will negatively affect El Salvador´s tourism revenues (usually accounting for about 8% of current account receipts) and private transfer inflows (typically accounting for about 40% of current account receipts). On top of that, risk aversion in the capital markets is reducing FDI and portfolio inflows towards El Salvador. Hence, in April, the IMF approved El Salvador’s request for emergency financial assistance of about USD 389 million under the Rapid Financing Instrument to finance the urgent balance of payment needs. It is the first disbursement under an IMF lending arrangement to El Salvador in over three decades. Nevertheless, despite the assistance of the IMF and other multilaterals, gross foreign exchange reserves are still declining (covering 3 months of import cover in June 2020) and likely to remain under pressure in the coming months. The main reason is the likely worsening of labour market and economic growth in the USA. Indeed, the USA (and many other parts of the world) has difficulties to control the covid-19 pandemic resulting into a rollback of lockdown reopenings during the summer. On top of that, market access is also deteriorating for El Salvador. Public debt is on the rise and is expected to reach a relatively high level of more than 80% of GDP in 2020 (coming from 70.2% of GDP in the end of 2019). This has already resulted in a fairly high coupon of 9.5% in July when the government of El Salvador issued external debt. As these events have been negatively impacting the liquidity position of El Salvador, Credendo has downgraded its short-term political risk classification to category 4/7.