New York-based rating agency Fitch Ratings has taken a hit on El Salvador's creditworthiness. The rating agency is concerned about the sustainability of the country's Bitcoin strategy. As a result, El Salvador's credit rating was upgraded from "B-" to "CCC," theoretically making it harder for the country to raise capital.
From Fitch's point of view, President Nayib Bukele's concentration of power is worrying. It makes El Salvador's politics unpredictable. Additionally, the adoption of Bitcoin as legal tender creates uncertainty about funding from the International Monetary Fund (IMF). El Salvador is eligible for IMF funding in 2022-2023, but that is highly uncertain at this time, according to Fitch.
Increased financial risk
According to Fitch, El Salvador is currently at increased financial risk. Among other things, they cite the maturity of short-term debt of USD 800 million in January 2023. Combine this with a budget deficit and limited means of raising capital in the market and the risk is complete. Fitch is also worried about El Salvador's creditworthiness in the medium term.
El Salvador is negotiating a $1.3 billion loan with the IMF. But the status of those talks is a question mark at the moment. Especially after the IMF asked El Salvador to abolish bitcoin as legal tender.
The Salvadoran government has been in talks with the IMF to fund $1.3 billion for more than a year. However, significant differences of opinion on key points make this financing highly uncertain in Fitch's eyes. “A deal would help the government fill gaps and potentially raise other funds. This would provide clarity on El Salvador's political strategy," Fitch said in the report.
El Salvador will issue bitcoin bonds next month
El Salvador's credit rating cut comes days after the announcement that Bitcoin bonds will go live next month. Alejandro Zelaya, finance minister, told local TV that he expects to sell the first bonds in March. The bond round should be ready to start between March 15th and 20th.
El Salvador initially wants to take USD 1 billion off the market with the bonds. But Zelaya hinted during the TV interview that he expects to sell another $500 million due to high demand. Which would mean that, thanks to Bitcoin, El Salvador would raise more money in one fell swoop than the $1.3 from the IMF that's on the reel.
The rating agency Fitch has less confidence in that. " There is a high degree of uncertainty as to what external source of funding El Salvador intends to tap," Fitch said of the bitcoin bonds. The new "CCC" credit rating means El Salvador faces significant credit risk, according to Fitch. March promises to be an exciting month for El Salvador.
In September last year, El Salvador became the first country in the world to adopt bitcoin as legal tender. "It's an experiment that a lot of people are watching with interest."
First country to adopt bitcoin as legal tender
The move comes from the country's 40-year-old authoritarian President, Nayib Bukele. He is an outspoken advocate of cryptocurrencies and wants to use them to grow the poor country's economy. Bukele invites bitcoin millionaires to live tax-free in El Salvador and even wants to build a real "bitcoin city". Its construction must be paid for through the issuance of bitcoin bonds, which are government-issued loans.
The International Monetary Fund (IMF), which monitors the world's financial stability and lends to countries in need, is concerned and wants El Salvador to stop, it said in late January.
El Salvador is playing with fire
According to the IMF, El Salvador is playing with fire. There is no oversight, consumers are at risk because Bitcoin's value fluctuates more daily than the USD (which also allows payments in the country that hasn't had its own currency since 2001) and the country's financial stability is at risk, warns the UN body not for the first time. But that advice fell on deaf ears with President Bukele, who poked fun at the IMF on Twitter.
In addition, Bukele allows his country’s central bank to trade Bitcoin itself on behalf of the government and pledge to build schools and hospitals for profit. " The central bank speculates with state money in this way," says economist Wim Boonstra from Rabobank, who wrote an analysis on the introduction. "If Bitcoin then falls in value sharply, little money is left to do good."
According to Bloomberg, El Salvador has now bought at least 1,800 bitcoins with state money – currently almost £60 million. If the central bank of El Salvador can no longer meet its payment obligations as a result, you have a problem; The IMF warns that the country could go bankrupt.
advantages for the situation
Many wealthier Salvadorans who have attended college live abroad, particularly in the United States. They remit about $6 billion annually to their families left behind, which is expensive and slow. For first world countries with stable economies, this happens quickly and cheaply, but in emerging markets like El Salvador, money transactions are a fairly shadowy event with money hanging on the bow. With Bitcoin you open a wallet and transfer money quickly and cheaply.
This saves the population money, which is good for the economy. The idea is that as they get richer, they spend more of the money they receive. This might be the main argument for the government to do this, and so far it's working.
3.8 million people use the national wallet
Although there are no official figures, the US investment fund Ark Invest estimates that 3.8 million Salvadorans use the Chivo national purse. That would correspond to 84% of the adult population. More El Salvador residents are said to have a bitcoin wallet than a bank account in the country where the vast majority of transactions are still settled with cash.
There are stories of companies having technical issues, certainly early in the rollout. ATMs weren't working, resulting in long lines and wasted money. Thousands of people took to the streets in September and October to protest.
However, it is still unclear how often payment is made in Bitcoin at the checkout. Much will depend on the experience of the companies: if they say this works well and they can manage the risks, then they might want to accept bitcoin in more countries. In this case, they don't have to wait for bitcoin to become legal tender. El Salvador is one such experiment that many people are watching with interest.
location today
While President Bukele never misses an opportunity to let the world know how excited he is about Bitcoin, his country is experiencing only modest economic growth. Although fewer people live below the poverty line, the promised boost through Bitcoin has not (yet) materialized.
Financial markets are far less enthusiastic about Bitcoin's adoption as legal tender. The rating agency Moody's expects that this could bring the country into financial difficulties. As a result, El Salvador's credit rating is worse and it is more expensive for the state to borrow money. Fitch's hit will have an impact on that too.
In the meantime, the country has been struggling with a lot of crime, gangs, drug violence and the murder rate is sky high for years. The human rights organization Amnesty has expressed serious concern about human rights in the country and the authoritarian behavior of President Bukele. He has fired judges, silenced journalists and called demonstrators against his Corona policy " criminals who want more dead people " . Squashing all of its critics — including the IMF — also makes the Bitcoin experiment a risky adventure.
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