Fitch downgrades El Salvador’s Default Rating
El Salvador’s weak institutions, the concentration of power in the presidency, and the adoption of Bitcoin as legal currency are making the country’s policy more unpredictable
February 11, 2022 3:16pm
Updated: February 12, 2022 11:29am
Fitch Ratings downgraded El Salvador’s Long-Term Foreign Currency Issuer Default Rating (IDR) from ‘CCC’ to ‘B-‘, announced the rating company on Wednesday.
El Salvador’s weak institutions, the concentration of power in the presidency, and the adoption of Bitcoin as legal currency are making the country’s policy more unpredictable, thereby causing the downgrade, said Fitch.
“The downgrade reflects heightened financing risks stemming from increased reliance on short-term debt, a USD800 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,” wrote the New York-based rating firm.
“Furthermore, debt to GDP is expected to rise to 86.9% in 2022 after modest improvement in 2021, increasing concerns around debt sustainability over the medium term.”
“Despite the authorities stated commitment to service debt, El Salvador faces increasing risks from high and growing financing needs in 2022-2023,” said Fitch.
El Salvador faces almost $1.2 billion in external debt amortizations, $800 of which are due in January. There is also a financing gap of $1.2 billion in 2022, which will increase to $2.5 billion in 2023.
The downgrade comes as El Salvador announced its first “bitcoin bond,” which would allow people to buy bonds with a minimum of $100 and do not require a stockbroker. The bonds offer a 6.5 percent coupon that matures in 2032.