El Salvador’s long-term foreign currency issuer default rating (IDR) has been downgraded from ‘B-’ to ‘CCC’ by Fitch Ratings.
The country’s adoption of Bitcoin as legal tender last year stood out among the driver factors of the rating change, according to a release from Fitch. Other heightened financing risks that triggered the downgrade include increased reliance on short-term debt, with a fiscal deficit that remains high, amid a limited scope for additional local market financing and uncertain access to external market financing. An $800 million Eurobond repayment due in January 2023 also weighed heavily in the decision.
“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 statement read.
Other institutional commentary
Since the beginning of the year, other financial institutions have also been beseeching El Salvador to abandon its adoption of Bitcoin. In a January report, the IMF once again urged El Salvador to drop Bitcoin as legal tender, citing financial stability risks. It had issued a similar warning prior to the country’s adoption of Bitcoin in September last year.
Meanwhile, Moody’s Investor Services said last month that trading Bitcoin is only worsening El Salvador’s already weak sovereign credit outlook. Moody’s analyst Jaime Reusche added that the government’s current Bitcoin holdings “certainly add” to the risk portfolio.
“If it gets much higher, then that represents an even greater risk to repayment capacity and the fiscal profile of the issuer,” Reusche said. Unheeding, President Bukele announced that he had purchased an additional 410 Bitcoin for $15 million during the midst of its slump last month. Moody’s had already downgraded the country last year.
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