By Rodrigo Campos
NEW YORK (Reuters) – Investors in international bonds in El Salvador have enjoyed a 60% return this year alone as sovereign debt issued by the Central American nation recovers from calls of ruin and default, with some We bet the rally isn’t quite over yet.
Rising tensions between Washington and the government of President Naib Bukre, dwindling prospects for a loan deal with the International Monetary Fund (IMF), and the impact of Bitcoin legal tender in a broadly challenging macro environment, El Salvador government bonds fell to a quarter of their face value last July.
A 12-month fast-forward and two surprise bond buybacks have left the country’s repayment schedule much lighter through 2027, while the appointment of a former IMF official as Treasury adviser sent the right signal to the market, investor said. Houses say. A bond due 2025 is trading at 89 cents, up from about 27 cents a year ago.
“In the summer of 2022, El Salvador bond prices diverged from fundamentals,” said Aaron Stern, managing partner and chief investment officer at Toronto-based Convelium Capital, which has held El Salvador bonds since last year.
“The market was concerned about whether the regime was willing to pay,” he said, but El Salvador still offers attractive value compared to many of the more expensive emerging sovereigns. said there is.
The appointment of former IMF official Alejandro Werner revived hopes that an IMF deal might finally work, and that by then the country might see more structured policy-making. Let
“Mr Bukele has one of the highest approval ratings and has managed it well. There is also the understanding that the country must continue to have access to markets…a dollarized economy,” said Shamaila Khan. said Mr. Head of Emerging Markets and Asia Pacific Fixed Income at UBS Asset Management.
El Salvador’s debt-to-output ratio was 77% in December, the lowest since 2019, but is expected to drop another percentage point this year and climb to 78% in 2024, according to Refinitiv data. . Total public debt rose from $25.4 billion at the end of 2022 to $19.7 billion in May.
Salvadoran dollar bonds currently yield between 14% and 18%, according to Refinitiv data. These were the best performing sovereign bonds in the first half of the year, with a total return of nearly 60%. And even after all this success, some say it’s not yet time to get your money back.
“In years when carry is the main driver of total returns, investors will be reluctant to take profits early,” said Natalie Malcic, managing director of Latin American fixed income at BNP Paribas.
“El Salvador is somewhat uniquely positioned as one of the highest yielding ‘performing’ distressed credits,” he said, noting that a “significant” fiscal deterioration or political pressure on the bond market could trigger further declines. A change of tone would be necessary, he added. .
JPMorgan changed its recommendation on the country’s hard currency debt from ‘market weight’ to ‘overweight’, saying that “the country’s external and fiscal situation look constructive in the short term.”
As Bukele seeks re-election under an amicable court ruling, February’s presidential election raises concerns about fiscal health and just how far the narrative still has to go Some people wonder if
“Ideally, some kind of policy adjustment would be announced early after the election to appease the market, as the current policy turmoil would be difficult to replicate in 2024,” Marsik said.
(Reporting by Rodrigo Campos; Editing by Karin Strohecker, William McLean)