El Salvador’s decision to accept Bitcoin (BTC) as a legal tender is turning out to have more ramifications than imagined. American rating firm, Fitch Ratings recently downgraded the country’s Long-Term Foreign Currency Issuer Default Rating (IDR) from B- to CCC, highlighting the Central American nation’s frailty and susceptibility to financing risks.
According to Fitch Ratings, El Salvador has “$800 million Eurobond repayment due in January 2023, a still-high fiscal deficit, limited scope for additional local market financing, uncertain access to additional multilateral funding, and external market financing given high borrowing costs,” with debt to GDP expected to rise 86.9% in 2022.
The financial outlook of El Salvador will not probably be worse if there is no concentration of power in the Presidency, a scenario that Fitch says will hamper policy predictability.
“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 program that would unlock financing for 2022-2023,” the rating firm said.
Recall that the International Monetary Fund (IMF) has consistently called out El Salvador with respect to its monetary policies drawing on Bitcoin. Negotiations have reportedly been ongoing with the body over the past several months on the need to bailout El Salvador with the sum of $1.3 billion over the course of 3 years to meet its short-term debt obligations.
With help from international monetary bodies like El Salvador’s stalling, and lending rate in the international market pegged at 15%, El Salvador seems to have very limited options to meet its short-term debt funding needs.
The country has a total of 1,800 Bitcoin in its Treasury, and should the digital currency continue on its upward path as predicted by President Nayib Bukele, perhaps it will be enough to help the country sort through its most pressing financial needs.
There are more than 50 million millionaires in the world.
Imagine when each one of them decides they should own at least ONE #Bitcoin
But there will ever be only 21 million #Bitcoin
No enough for even half of them.
A gigantic price increase is just a matter of time.
— Nayib Bukele 🇸🇻 (@nayibbukele) January 31, 2022