OREANDA-NEWS. Gains by opposition parties in El Salvador's legislative assembly could result in a compromise to improve the sustainability of public finances but political polarization is likely to continue weighing on the prospects for growth-enhancing and security reforms, Fitch Ratings says.

According to preliminary results, El Salvador's main opposition party, the Nationalist Republican Alliance (ARENA), became the largest congressional force, extending its control to 35 of the 84 seats in the new legislature. Although no party achieved a simple majority, ARENA obtained the 29 votes necessary to block key pieces of legislation, including the issuance of new public debt in international markets. That is likely to play an important role in financing president Salvador Sanchez Ceren's reform program in 2014-2019. The Farabundo Marti National Liberation Front (FMLN) elected 31 deputies. This will make the ruling FMLN dependent on consensus-building and alliances with minority blocks and independents to advance its legislative agenda.

ARENA's leadership has stated that it will not authorize additional government external bond placements before the government party secures the passage of a new fiscal responsibility law (FRL) that was postponed after the approval of last year's tax reform. The FRL originally included raising the tax burden to 17% of GDP in 2018 from 15% in 2014, shifting the current primary fiscal deficit of 1.2% of GDP to a surplus of 2.5%, and bringing non-pension public debt down from 46% of GDP in 2014 to 42% by 2023. The plan envisioned a transition period in 2015-2018 with moderate reductions in budget deficits, with most consolidation efforts coming in the following 10 years.

The approval and effective implementation of a credible FRL could have a positive impact on public finances, one of El Salvador's main credit weaknesses. However, Fitch sees limited prospects for fiscal consolidation and debt stabilization in the near term in the absence of faster economic growth, a more front-loaded budget adjustment, and greater degree of political consensus to tackle fiscal rigidities through comprehensive legislative reforms. For example, pension liabilities accounted for one-half of the 3.6% of GDP budget deficit and one-fifth of the 58.2% of GDP sovereign debt burden in 2014.

Voters also elected 262 mayors, approximately 3,000 municipal council members, and the country's 20 representatives to the Central American Parliament. The new authorities will be sworn in on May 1, 2015.

The Salvadoran economy grew an estimated 2.1% in 2014, above our previous 1.5% forecast, but still one-half the 'BB' median rate of 4%. Growth prospects could benefit from higher infrastructure and energy investment and the recovery in the U.S., the country's main source market for family remittances, and exports of goods. Lower international oil prices should also contribute to reduce energy subsidies and a burdensome fuel import bill. Nonetheless, political polarization and high crime rates could continue to constrain business confidence and growth potential.

Fitch affirmed El Salvador's ratings at 'BB-' with a Negative Rating Outlook in July 2014.