Fitch Downgraded El Salvador’s Rating Citing Bitcoin Adoption Risks

Fitch cited policy unpredictability stemming out of the increased concentration of power in the presidency, weakening institutions, and the legalization and adoption of Bitcoin as the reason for lowering the rank.

Reasons Behind The Move

As per the official post, “heightened” financing risks arising from growing dependency on short-term debt reflects Fitch’s move of downgrading El Salvador.

It also pointed out the limited scope of the country’s domestic market financing as well as uncertain access to additional multilateral funding and external market financing considering high borrowing costs. Increased concerns with respect to debt sustainability due to the expected increase in GDP next year after modest improvement in 2021 is yet another factor.

It stated,

“In Fitch’s view, weakening of institutions and concentration of power in the presidency has 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.”

Fitch stated that El Salvador continues to face growing risks caused by high and increasing financing needs in 2022-2023. It further estimated that the Central American country’s total financing needs would total to a whopping $4.85 billion in 2022, meaning a 16% increase in GDP.

Another 18% rise in GDP to $5.4 billion is also expected. In terms of financing options in the local market, the rating firm noted that the domestic private pension funds and banks have a restricted appetite for growing their exposure to such instruments.

It also observed “uncertainty” around external financing options, including multilateral funding, as well as doubts over an IMF program, in addition to El Salvador’s capacity to issue “bitcoin-backed bonds.”

El Salvador’s Ambitious Bitcoin Bond Issuance Plans

Earlier this week, El Salvador’s finance minister Alejandro Zelaya announced plans to issue Bitcoin Bonds between March 15 and 20. During the interview with the local news outlet, Zelaya also confirmed that the government will issue $1 billion for the first bond.

Besides, cryptocurrency peer-to-peer platform, Paxful earlier launched a Bitcoin education center in the country. The main objective behind the creation of the new center, dubbed ‘La Casa Del Bitcoin,’ is to foster awareness around the benefits of buying and selling BTC as a means of exchange for the El Salvadoreans.