El Salvador / Newsletter

Finance Could Be Bukele's Achilles Heel

The falling price of bitcoin underscores El Salvador’s precarious debt crisis, financial experts say. Bukele, nevertheless, perseveres: On Monday he announced a new $15 million state bitcoin purchase and, ignoring those who forecast a default, boasted about his mockup of the megaproject Bitcoin City, a libertarian tax haven and crypto-paradise in the Gulf of Fonseca.

Friday, May 13, 2022
El Faro English

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On Monday night President Nayib Bukele announced he had bought 500 bitcoins, the latest move casting doubt and controversy on El Salvador’s public finances. If true, he has now purchased a grand total of 2,300 —from his cell phone, he says— since the Bitcoin Law was passed in September.

“El Salvador just bought the dip,” he tweeted, in reference to the fact that bitcoin was trading at $30,700 — the lowest point since July. Two days later it had dropped to $26,000, though by Friday it had recovered to $30,000. London-based financial research firm EMFI and Bloomberg estimated the government had in less than a year lost 35 percent, or $36 million, of its heavily-publicized, controversial investment of $103 million in public funds.

“Salvador hasn’t yet announced a default, but its bonds are trading as if they had,” wrote EMFI on May 5. On a five-year horizon international credit evaluators say that, barring the market signal of an IMF agreement, the risk of insolvency jumps to 87 percent. The bitcoin losses represent less than one percent of El Salvador’s fiscal income, though EMFI notes that “every cent counts due to the current funding constraints.”

The country needs to come up with $2.1 billion to meet its financial obligations this year and, additionally, pay back $800 million in Eurobonds due in January. The government is seeking an array of loans from international funders including the Central American Bank for Economic Integration and the Andean Development Bank of Latin America (CAF).

El Salvador’s fiscal problems don’t stem from bitcoin, but it is true that it [the Bitcoin Law] has contributed to the deterioration of the country’s risk profile,” Ricardo Castaneda, analyst with the Central American Institute for Fiscal Studies, told El Faro English. 

On May 9 Bukele unveiled a mockup of Bitcoin City.
On May 9 Bukele unveiled a mockup of Bitcoin City. 'The actual city will be mostly green (trees) and blue (sea),' he tweeted. Photo: Twitter

The three major U.S.-based credit evaluators have ranked El Salvador as the riskiest in Central America. Fitch Ratings cited the Bitcoin Law, as well as the “weakening of institutions and concentration of power in the presidency,” in its appraisal. 

“If El Salvador were to look to issue bonds now, assuming that somebody would buy, they would have to pay 25 to 26 percent interest,” Castaneda continued, “whereas a year ago they would have paid around 7 percent.”

Debt refinancing negotiations with the International Monetary Fund (IMF) appear to have halted, but the Bukele administration rebuts any assertion of troubled waters. Treasury Minister Alejandro Zelaya has repeatedly asserted that El Salvador is facing “zero” chance of default and that risk evaluators “aren’t measuring the reality.”

“Some people keep talking about the country’s risk profile, but in two years we’ve demonstrated that El Salvador is undergoing a historic economic transformation,” the minister said in March, adding: “Past governments never planned for the future. Our job is to plan for our fiscal commitments, all of which are covered.”

Hours before his latest purchase of bitcoin, Bukele unveiled a gold-colored, circular mockup of Bitcoin City, a municipality exempt from income, property, and capital gains taxes and shaped in a circle with a bitcoin sign in the middle. He promises to construct the city at the foot of the volcano Conchagua, in the eastern coastal department of La Unión. Such an investment of public funds would also entail large-scale improvements of rural roads and highways, plus he has said he will build a new airport.

He has not explained where he will get all of the money for the project, but has said he will partially fund construction with $500 million in “volcano bonds” denominated in dollars that the administration will convert to bitcoin. He announced the bonds in November and suggested they could be ready in 60 days, but has indefinitely delayed their issuance, citing the war in Ukraine, the downturn in global markets, and a nationalization of pensions that would open another pocket of cash to finance the government.

Since the dawn of his political career as mayor of Nuevo Cuscatlán, Bukele, a former publicist, has shown a penchant for promising megaprojects and accumulating debt, notes El Faro’s Gabriel Labrador in the first comprehensive profile of the president. In his first 21 months as mayor of the town, for example, he acquired as much debt as the town’s previous five-year average. Nuevo Cuscatlán, sitting on the outskirts of the capital, is now the only town to refuse to release public information on municipal debt.

Electoral Calculus

EMFI says that some market analysts believe the administration is looking to avert a major credit incident before election season begins next year in the lead up to 2024 elections.

Analysts like former Central Reserve Bank president Carlos Acevedo believe the government is unlikely to default before the elections by tapping into a combination of international loans, foreign currency reserves, and the country’s embattled pension fund. El Salvador also joined the Caracas-based CAF on March 10 and could negotiate additional short-term financing.

“What Minister Zelaya does not or is afraid to understand is that the greatest risk facing the government is in Casa Presidencial and has a Twitter account with more than three million followers,” writes Salvadoran journalist and Cal State Fullerton academic Ricardo Valencia in a column for El Faro English.

“There are those in international finance who suspect that if Bukele is unconstitutionally re-elected in 2024 he could unilaterally rewrite the terms of the debt, or decide not to pay altogether,” Valencia adds. “Bukele would have the perfect cast of scapegoats: multilateral financial organizations, the U.S. government, and the political opposition.”

On Thursday Bukele retweeted his own post from last June, the day after he announced he would make bitcoin legal tender: “One thing I’ve always admired about Steve Jobs is that he never even looked at Apple’s stock price. He knew where his company was going,” he wrote. “The stock market will follow, when they understand.”

That’s hardly the message of someone poised to cut his losses in the bitcoin arena.

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