El Salvador likely to default due to Bitcoin adoption, but President Bukele is not giving up

Completely at home, villain abroad. El Salvador’s bitcoin maverick president Nayib Bukele made perhaps one of the boldest decisions in modern economics: adopting the divisive crypto-asset as legal tender.

Although the decision has been interpreted as progressive in the cryptocurrency world, the values ​​are not yet reflected in the country’s balance sheet.

Mounting bitcoin losses

Bukele wanted to build Bitcoin City, a tax-free haven that runs entirely on bitcoin. Both the new city and his regular BTC purchases were a statement of intent. The idea still exists, although very little has happened in the city’s construction.

A planned $1 billion bitcoin bond to finance energy and mining infrastructure has stalled. The bond, also aimed at buying even more bitcoin, was announced in November and originally planned for March.

According to Nayib Tracker, a website that tracks the president’s bitcoin purchases, El Salvador is 57% below its bitcoin stake. Since September 2021, when Bukele started its bitcoin purchases, the country has acquired 2,381 BTC, at an average price of $45,000.

That’s a total of $107.2 million, but the portfolio is currently worth just $46.27 million. The purchases have yet to justify Nayib Bukele’s decision to defy warnings from the International Monetary Fund (IMF).

In January, the IMF wrote that “there are major risks associated with the use of bitcoin on financial stability, financial integrity and consumer protection, as well as the associated fiscal contingent liabilities.”

Down, but not out

Despite the warnings, Bukele insisted he is taking his country on the right track. Otherwise, as tourism, he has not come out as badly.

El Salvador’s tourism receipts are among the best post-pandemic. According to the country’s Ministry of Tourism, tourist spending has increased by 81% since the decline of the coronavirus.

World Bank statistics show that international tourist arrivals grew from 707,000 in 2020 to more than 1.2 million this year.

Despite the growth, the rating agencies are convinced that the country’s risk profile will worsen further if it continues down the cryptocurrency path.

On September 15, Fitch Ratings downgraded El Salvador to CC from CCC, saying the country is likely to default on foreign bond payments due early next year. The latest rating is nine times below BBB, which is the minimum rating required to qualify for an investment grade rating.

“El Salvador’s tight fiscal and external liquidity positions and extremely limited market access amid high fiscal financing needs and a large external bond maturity of USD800 million in January 2023 make default of some form likely,” the rating agency said in a report.

Moody’s, another rating company, blamed the potential default on the use of bitcoin. It said in January that “political differences related to the government’s embrace of bitcoin had lowered the likelihood” of the IMF providing a $1.3 billion loan to El Salvador.

President Bukele hoped to use this money to pay the upcoming bond maturity. El Salvador has been negotiating an agreement with the IMF since March 2021.

Bukele is seeking a second term

Despite global concerns over his leadership style and economic decisions, 40-year-old Bukele remains very popular in the Central American country.

Ever since he took office on June 1, 2019, Bukele’s popularity has not gone below 75%. A recent public opinion poll conducted by Cid Gallup showed that his ratings are rising and they are currently at 86%, making him the most popular president in Latin America.

Bukele has expressed his intention to run for a second term as the country’s president, after his current term, which expires in 2024.

He hopes that public sentiment remains on his side and that at some point the bitcoin market stops its downward spiral and recovers.

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