El Salvador's economic trajectory has received a significant vote of confidence from Moody’s Ratings, which recently upgraded the country's sovereign outlook from stable to positive. This decision reflects a recognition of the nation's consistent efforts towards fiscal stabilization and economic growth, although the underlying B3 sovereign rating was affirmed, indicating that challenges persist.
Driving the Positive Outlook
The shift to a positive outlook by Moody's is primarily driven by an anticipated gradual and sustained improvement in El Salvador's fiscal and credit indicators. Key factors cited include robust fiscal consolidation efforts, the strengthening of liquidity buffers, and a reduction in gross financing needs. The rating agency highlighted increased credibility in fiscal policy, reinforced by adherence to an IMF program, and marked improvements in internal security. These advancements are expected to foster higher GDP growth and lead to durable credit enhancements, potentially paving the way for further sovereign rating upgrades in the medium term. Fiscal performance in 2025 notably strengthened, with the fiscal deficit estimated to have shrunk to 3% of GDP, projected to continue declining in subsequent years, primarily due to spending controls and increased tax revenues.
B3 Affirmed: Lingering Hurdles
Despite the brighter outlook, Moody's maintained El Salvador's sovereign rating at B3, emphasizing that while economic and fiscal progress is significant, more time is needed for these improvements to fully translate into key credit metrics. The affirmation reflects the government's still-elevated debt burden, which stood at 88.3% of GDP in 2025, and low debt affordability, with interest payments reaching 18.4% of revenues. These conditions continue to limit El Salvador's fiscal strength and heighten its vulnerability to external shocks. While a gradual improvement in these indicators is foreseen, Moody's assessment indicates that structural challenges in debt metrics will only improve incrementally, thus warranting the current B3 rating.
Fiscal Strength and Economic Momentum
El Salvador's economic recovery has been bolstered by strategic fiscal adjustments and accelerated GDP growth. The fiscal deficit reduction in 2025 was spurred by spending cuts and strengthened tax revenues, aided by efficiency gains and a broader tax base. Concurrently, real GDP growth accelerated to 4% in 2025, with projections for continued growth above historical trends. Notably, public investment, particularly in construction, stimulated economic activity, while significant improvements in security are seen as structural, attracting increased private investment. Furthermore, the government's financing needs are projected to decline substantially in the coming years due to reduced fiscal deficits and improved debt management, thereby mitigating liquidity risks. This combination of fiscal discipline, economic expansion, and enhanced financial stability underpins the improved outlook, even as the nation navigates its ongoing structural debt challenges.
