Fitch Affirms Ratings On ElSalvador.

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 30, 2000

Fitch, the international rating agency, today affirmed its foreign and local currency ratings of `BB+' and `BBB', respectively, for the Republic of El Salvador. The Rating Outlook remains Stable.

El Salvador's

El Salvador's ratings are constrained by structural weaknesses in public finances; low savings and investment rates; a narrow export base; comparatively weak social indicators; relatively poor infrastructure facilities -- particularly roads and ports -- and high crime rates that deter foreign investment.

The Salvadoran economy has successfully weathered external and domestic pressures over the last two years. Although economic growth has slowed and fiscal pressures have intensified, Fitch believes that fiscal imbalances remain manageable. However, faster fiscal consolidation would be required to support sovereign credit worthiness. Under a fixed exchange rate regime the inflation rate has declined. The average inflation rate fell from 18 percent in 1995 to 0.5 percent in 1999, now among the lowest in its peer group.

A modest external debt burden with a favorable maturity profile also supports the ratings. A total external debt-to- exports ratio of less than 90 percent compares favorably against other `BB+' rated sovereigns and is lower than that of some of the low investment-grade countries. El Salvador's low level of external debt service and the favorable maturity profile of its public external debt are largely due to the country's heavy reliance on multilateral and bilateral funding.

Setting it apart from some of its neighbors, El Salvador has implemented a series of impressive structural reforms that could improve the overall competitiveness and resilience of the economy. These reforms include extensive trade liberalization, pension reform and privatization of the banking, telecommunications and electricity distribution sectors.

High tax evasion and light direct taxation have constrained the government's tax base. At 10.5%, the tax-to-gross domestic product (GDP) ratio is low. It is also insufficient to finance the large social and physical infrastructure needs of the country and accommodate the future costs of pension reform, which could exceed 2 percent of GDP by 2004. Recently enacted measures to boost revenues are a step in the right direction, but more tax-raising reforms are needed.

El Salvador's medium-term growth prospects are constrained by low savings and investment rates and a low and narrow export base. Increased foreign direct investment (FDI) could strengthen export capacity and increase investment rates in the economy. Despite efforts towards attracting FDI, non- privatization FDI inflows remain small. The free trade agreement with Mexico and the U.S.-led Caribbean Basin Initiative (CBI) provide the country with a unique opportunity to attract greater FDI in the `maquiladora' industry (special zones for assembly and export). A higher export capacity would be essential for stimulating growth and mitigating the risk of lower overseas workers' remittances in the medium term.

Going forward, Fitch will closely monitor the government's progress on fiscal measures aimed at increasing the tax-to- GDP ratio and reducing pressures stemming from pension reform. Fitch will also monitor relations between the governing Alianza Republicana Nacionalista (Arena) party and the opposition Frente Farabundo Marti para la Liberacion Nacional (FMLN) party, particularly regarding the capacity of the government to put reforms through Congress. Privatization of the remaining state-owned banks and electricity generation facilities would send the right signal to investors about the government's commitment to structural reforms. Along with the passage of the remaining tax package, Fitch would view these privatizations positively.

The higher local currency ratings reflect Fitch's view that the government has a higher capacity to pay its local currency debt due to its taxation power and control over the banking system. Moreover, local currency government debt, at 7 percent of GDP, is low. The local currency rating remains constrained by the underdeveloped government securities market, the constraints on monetary policy of the fixed exchange rate regime and potential pressures on public finances.

Fitch is an international rating agency that provides global capital market investors with the highest quality ratings and research. Dual headquartered in New York and London with a major office in Chicago, Fitch rates entities in 75 countries and has some 1,100 employees in more than 40 local offices worldwide. The agency, which is a combination of Fitch IBCA and Duff & Phelps Credit Rating Co., provides ratings for Financial Institutions, Insurance, Corporates, Structured Finance, Sovereigns and Public Finance Markets worldwide.