El Salvador Allays Default Fears by Announcing Sovereign Debt Buyback

While the rest of the world’s government grapples with grim macroeconomic conditions, El Salvador is bucking the trend and has announced it has enough cash to pay its debts before they mature.

As 2023 approaches, economists debated how El Salvador intended to service an $800 million bond maturity. In a twist of fate, Nayib Bukele, the country’s president, has quelled concerns by revealing a repayment plan. 

Bukele stated on Twitter that his government has sent two bills to the legislative house to approve his plan to voluntarily purchase sovereign debt bonds that are due between 2023 and 2025.

A percentage of the massive buyback is financed by reserves from the IMF and Central American Bank for Economic Integration (BCIE), a regional lender, said the country’s finance minister.

“Contrary to what the media has been saying all this time, El Salvador has enough liquidity, not only to pay all of its commitments when due but also to buy all of its debt (until 2025), in advance,” said Bukele.

El Salvador to buy back at the market price

Bukele announced that the country will pay the market price for the bonds after the approval of the plan by the legislative house. He added that the process will begin in six months and that prices could spike immediately when the buyback begins.

A Citi Research study suggests that the entire process could cost more than $1.7 billion. The note warns that the unexpected buyback poses certain risks like the price spike of short-end bonds.

“Risks are high, and the situation remains very fluid,” read the research note.

Bukele ended the announcement by hoping the media gives attention to the move in the same way they “published hundreds of articles saying that we are headed for a default.”

Bukele’s ratings soar

A recent Gallup poll to gauge the performance of leaders in Latin America saw Bukele come out tops with a rating of 89%. Ratings soared following his deft handling of the economy after the blip of the pandemic year and his crackdown on gang activities.

Costa Rica’s Pilar Cisneros comes in second place with 77%, while Peru’s Keiko Fujimori occupies the bottom of the chart with 26%.

Under Bukele’s stewardship, El Salvador became the first country to adopt Bitcoin as legal tender, with opinion split over the success of the move.