This EM is most-improved on sovereign risk metrics in 2025

The answer is, of course, El Salvador.

As I continue to track sovereign risk across 43 market-access emerging markets, overall risk has increased due to a strong increase in volatility and risk-off investor sentiment.

But despite the VIX surging by 40% year-on-year through early May 2025, El Salvador’s stress probability is only 4 percentage points higher than it was last year.

Sure, the country still ranks as fifth-most at risk, at a nearly 92% likelihood of sovereign stress. To be clear, the IMF model I base this on doesn’t solely include default as a stress episode: yield and spread dynamics count as well, along with distressed exchanges and similar events.

VIX is a global factor, but El Salvador’s domestic macro-fiscal metrics have mostly improved.

The current account is on track to increase by half a percentage point of GDP in 2025.

The real exchange rate trajectory is also constructive, with more real depreciation on the cards this year.

Government debt-to-GDP growth is slowing significantly, to a near-standstill. External public debt is down by some 1.3% of GDP, while public debt-to-revenue is also moderating.

The only worsening domestic indicator out of the ones tracked here is a slight decline in the reserves-to-GDP ratio, though at -0.4% of GDP the damage is limited.

These improvements are welcome news for a country with such a weak macro-debt position.

El Salvador’s reserves level is low. At 9% of GDP, this figure is in the 92nd percentile of most-at-risk across the 43 EMs on this indicator.

Similarly, at 33% of GDP, its external public debt burden is also higher than for four fifths of in-sample EMs.

The debt-revenue metric isn’t great either: at over 320%, it is higher than in three quarters of other EMs.

As such, it is unsurprising that El Salvador’s two largest sovereign risk drivers are external public debt and public debt-to-revenue.

The country thus needs to decrease its debt burden and mobilize revenue, both of which align with its commitment to fiscal reform under its new IMF program.

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