Fitch Drops El Salvador’s Rating Due To Bitcoin Among Other Reasons
New York-based credit rating agency, Fitch, has downgraded El Salvador’s long-term foreign currency issuer default rating (IDR) from “B-” to “CCC.”
According to Fitch, policy unpredictability due to increased concentration of power in the presidency, weakening institutions, and the legalization and adoption of Bitcoin are the reasons for the rank drop.
The credit rating agency said in a statement:
“In Fitch’s view, weakening of institutions and concentration of power in the presidency have increased policy unpredictability, and the adoption of bitcoin as legal tender has added uncertainty about the potential for an IMF [International Monetary Fund] program that would unlock financing for 2022-2023.”
Fitch views that El Salvador is facing “heightened financial risks” related to factors including its reliance on short-term debt, an $800 million bond maturing in January 2023, a fiscal deficit that remains high and limited financing options in the local market. The credit rating agency is also worried about El Salvador’s debt sustainability in the medium term.
El Salvador and International Monetary Fund (IMF) have been negotiating on a $1.3 billion loan. However, the status of those talks is currently unclear, as the IMF directors recently urged El Salvador to drop Bitcoin as legal tender.
Fitch further noted:
“The government has been in extended discussions with the IMF for nearly a year for a possible USD 1.3 billion three-year program; however, there are important differences between the two sides in many key areas, in Fitch’s view. A deal would help cover the government’s financing gap and likely unlock other multilateral loans. It would also help provide more clarity on the government’s medium-term fiscal strategy.”
El Salvador’s finance minister Alejandro Zelaya, earlier this week, announced plans to issue Bitcoin Bonds between March 15 and 20. During the interview with the local news outlet, Zelaya also confirmed that the government will issue $1 billion for the first bond.
Fitch, however, isn’t convinced about the certainty of external financing sources, including the bitcoin bonds.
“There is a high degree of uncertainty surrounding other sources of external financing, such as additional multilateral funding, given doubts surrounding an IMF program, as well as the capacity to issue ‘bitcoin-backed bonds’ through new distribution channels.”
Any rating BB or lower is considered “speculative grade,” which indicates a higher level of credit risk than “investment grade” ratings. A CCC rating signals “substantial credit risk.”
