Fitch Ratings-New York-06 July 2010: Fitch Ratings today has affirmed El Salvador's long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB' with a Negative Rating Outlook. Fitch has also affirmed El Salvador's short-term IDR at 'B' and Country Ceiling at 'BBB-'.

Monetary stability underpinned by official dollarization, a good track record on structural reforms, a stable financial sector and continued multilateral support underpin El Salvador's credit ratings. Moreover, the country was able to navigate the global financial crisis and an unprecedented domestic political transition whereby the FMLN led-government took power after nearly 20-years of ARENA-led democratic government.

The Funes administration has pledged policy continuity and moved forward with a revenue-enhancing fiscal reform to facilitate modest fiscal consolidation. Near-term financing constrains present in 2009 have also eased due to continued multilateral support, a considerable reduction in short-term government debt and the ability of El Salvador to access domestic and international capital markets in the fourth quarter of 2009.

In spite of these developments, Fitch notes that greater than expected economic contraction and a high fiscal deficit led to a sharp deterioration in public debt, which reached 49% of GDP in 2009 from 39.7% in 2008. In Fitch's view, the low growth and still unfavorable debt dynamics present risks to El Salvador's sovereign creditworthiness, justifying the Negative Outlook on the ratings.

'In the context of dollarization, continued rise in public debt burden would further limit the country's fiscal maneuverability in the event of potential external and domestic shocks,' said Erich Arispe, Director in Fitch's Sovereign Group. 'At the same time, measures to invigorate growth to alleviate debt dynamics do not feature prominently in the policy agenda.'

Among Central American sovereigns rated by Fitch, El Salvador was the most affected by the global financial crisis as a result of its close economic ties to the U.S., reliance on workers remittances, the absence of monetary policy and lack of fiscal cushion. The economy contracted 3.5% in 2009 after expanding 2.4% 2008.

'El Salvador's growth recovery and future prospects appear weaker than those of most peers in light of the country's economic narrowness, low investment levels and continued economic and political uncertainty,' added Arispe. Hence, Fitch forecasts growth of 1% and 1.8% in 2010 and 2011, respectively, lower than the 'BB' median of 3% and 4%.

Fiscal consolidation over the forecast period could be challenged by growth and revenue under-performance and/or a delay in the implementation of expenditure saving strategies. Fitch forecasts that El Salvador's non-financial public sector debt could continue increasing through 2011 reaching over 50% of GDP this year, against the 'BB' median of 42%. Continued pro-active policy response will be needed to stabilize the debt burden should growth fail to gain pace.

Significant deterioration of fiscal solvency ratios without signs of stabilization, deterioration in the financing outlook, and reemergence of political gridlock could result in downward pressure on El Salvador's sovereign ratings. On the other hand, continued macroeconomic stability and an appropriate policy response to stabilize the government debt burden and invigorate growth could lead to the revision of the Outlook to Stable.

Applicable criteria, 'Sovereign Rating Methodology', dated Oct. 6, 2009, is available at 'www.fitchratings.com'.

Contact: Erich Arispe +1-212-908-9165 or Shelly Shetty +1-212-908-0324, New York.

Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

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