Fitch cuts El Salvador debt to ‘CCC’ as funding gap looms
16:24, 10 February 2022
Fitch Ratings downgraded the long-term foreign currency Issuer Default Rating (IDR) of El Salvador to ‘CCC’ from ‘B-’ overnight, citing a funding gap for debt maturities coming due in the second half of 2022.
Fitch credit rating scale - Fitch Ratings- Fitch’s ‘CCC’ rating, seven notches above Restricted Default, is defined as “Very low margin for safety. Default is a real possibility.” Standard & Poor’s currently has a ‘B-’ rating on El Salvador’s sovereign debt and Moody’s rates El Salvador at ‘Caa1’.
- In the credit rating agency’s view, the Central American country’s ability to access an International Monetary Fund (IMF) loan needed to meet nearly $1.3bn (£960m) in debt due in August through October is uncertain, in part, to the adoption of Bitcoin as legal tender, which the IMF opposes.
Overall financing needs will increase to $5.4bn by 2023, including a $800m Eurobond due in January 2023, creating a nearly $2.5bn funding gap, Fitch added.
“The government has been in extended discussions with the IMF for nearly a year for a possible $1.3bn three-year programme; 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.”
In order to access IMF funding, El Salvador needs to improve governance in reporting and audits, implement anti-money laundering laws and remove Bitcoin as legal tender while improving oversight of its virtual currency system, the IMF said in its recent Article IV Consultation with El Salvador.
“The adoption of a cryptocurrency as legal tender, however, entails large risks for financial and market integrity, financial stability, and consumer protection,” the IMF report said. “It also can create contingent liabilities.”
El Salvador’s access to liquidity is limited, Fitch notes, as it has issued nearly $3bn in Letes and Cetes and is restricted from issuing more due to legal constraints, as well as “local private pension funds and banks have limited appetite for increasing their exposure to such instruments.”
External financing options are also limited due to prohibitively high borrowing costs in the international bond markets, topping 15%. El Salvador’s recent debt offerings have not been fully subscribed.
Bitcoin bond offering
El Salvador has previously announced plans to offer a $1bn 10-year bond backed by Bitcoin, which would pay a 6.50% coupon plus a dividend of 50% of any gains in the cryptocurrency, as previously reported. Coupon payments would be made in either US Dollars or the stablecoin Tether.
The country’s president, Nayib Bukele recently outlined the proceeds of the potential Bitcoin-backed bond, half of which would purchase Bitcoin with the other half funding the development of a tax-free Bitcoin City within El Salvador that would be powered by a volcano.
The Bitcoin bond offering is tentatively scheduled for next month, Finance Minister Alahandro Zeleya said on local television programme ‘Frente a Frente’.
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