(Bloomberg) -- Morgan Stanley has turned neutral on El Salvador debt, arguing that there’s little room for gains after a 20% rally in recent months.
Simon Waever, the global head of emerging-market sovereign credit strategy, removed the bank’s “like” call on the Central American nation’s debt, according to a note published Monday. Some of the bonds are hovering around par for the first time in years, reflecting optimism over the government’s budget belt-tightening and the likelihood of a deal with the International Monetary Fund.
Waever was one of the first strategists to turn positive on the debt when prices bottomed out more than two years ago. The bonds have handed investors returns of nearly 300% since then, according to data compiled by Bloomberg. That includes a 20% rally since late May — when Morgan Stanley added its most recent “like” call — after President Nayib Bukele proposed a zero-deficit budget for next year and carried out a debt-for-nature swap.
Waever said that transaction retired 13% of the nation’s Eurobond stock, while tourism and remittances have helped narrow the current-account deficit.
Still, the government’s fiscal adjustment is likely to be smaller than the one budgeted due to slowing economic activity. And while a deal with the IMF is possible, it seems less urgent for authorities and Bitcoin remains a key hurdle, he wrote.
“The 2025 budget signals the intention,” to reduce the deficit, he wrote, “but actual implementation is likely to be more difficult given the sizable spending cuts.”
Even if El Salvador were to announce a staff-level agreement in the coming weeks, the curve is already trading tighter than a selection of peer credits that are already in IMF programs, Barclays analyst Jason Keene wrote in a note Monday.
(Adds Barclays comments in final paragraph.)
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