El Salvador's International Bonds Rally: Investors Enjoy 60% Return Amid Renewed Confidence

Source: Canva

Investors in El Salvador's international bonds have enjoyed a 60% return this year as the Central American nation's debt bounces back from previous dire predictions of default. There is growing confidence that this upward trend has not yet reached its peak.

Last July, El Salvador's bonds dipped to a quarter of their face value due to escalating tensions between the US and President Nayib Bukele's government, diminished hopes for a financial agreement with the International Monetary Fund (IMF), and the contentious fallout from the introduction of Bitcoin as legal tender.

Fast-forward to today and two unexpected debt buybacks have significantly reduced the country's payment obligations until 2027. Concurrently, the appointment of Alejandro Werner, a former IMF official, to an advisory role in the finance ministry has boosted market confidence.

Currently, a bond set to mature in 2025 is trading at 89 cents, a stark contrast to its value of 27 cents a year ago. Despite this turnaround, El Salvador's bonds are still seen as an attractive investment compared to many other higher-priced sovereigns in emerging markets.

Furthermore, the appointment of an ex-IMF official has revived hopes for an eventual agreement with the IMF. This development, combined with an expectation of more structured policymaking, is keeping investors interested.

El Salvador's debt-to-output ratio, at 77% in December, was the lowest it had been since 2019. It is expected to decrease another percentage point this year before rising to 78% in 2024, according to Refinitiv data. The total public debt experienced a reduction, falling to $19.7 billion in May from its previous level of $25.4 billion at the conclusion of 2022.

Salvadoran dollar bonds currently yield between 14% and 18%, making them the best-performing sovereign bonds in the first half of the year, with total returns nearing 60%. 

Some market observers believe that it's not yet time to sell, suggesting that it would take a significant fiscal deterioration or a shift in political sentiment toward the market for bonds to experience another sell-off.

JPMorgan has upgraded its recommendation on El Salvador's hard-currency debt from "market weight" to "overweight", signaling a positive short-term outlook for the country's fiscal situation. 

However, upcoming presidential elections have raised concerns about fiscal prudence, especially as Bukele seeks re-election following a favorable court ruling. Investors will be looking for an announcement of policy adjustments after the elections to keep the market stable.

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