• The Central American country’s debt yield, spread relative to U.S. Treasury bonds, reached an all-time high this week.
• The agency recently cut El Salvador’s financial rating, citing the likelihood of a default.
• This week saw the return of talks between Salvadoran officials and IMF. The discussion will focus on money laundering as well as accountability for public funding.

With the credibility of its financial policy falling through, El Salvador should look to form a debt agreement with the International Monetary Fund to improve its image and credit capacity, suggested Vice President and Senior Director of Credit at Moody’s Investors Service, Ariane Ortiz-Bollin.

The risk rating agency official admitted that the performance of the Salvadoran economy has been relatively acceptable so far, and the country’s income has even been increasing, Reuters reported.

She cautioned, however that it was more about “the certainty on the policy predictability which comes with an IMF arrangement, which is something the country is severely lacking at the moment.”

In relation to U.S. Treasury Bonds, this week’s yield on Central American external debt reached an all-time high of over 2,600 basis points.

El Salvador is not able to access international financial markets. This severely limits its ability to pay. In early May, Moody’s Investors Service downgraded its key rating for the nation of some 6.5 million people.

The agency cut El Salvador’s rating to Caa3, referencing “increased probability of a credit event.” International financial analysts have predicted that without the support of the IMF, the government will be unlikely to be able to meet the $800 million debt service due in early 2023.

After a lengthy hiatus, the credit agency announced this week that they had resumed negotiations with Nayib Bukele’s government. Diverse topics will be covered including how fast and what type of fiscal consolidation is happening, the anti-money laundering measures and fiscal transparency as well as the management of public money.

Another contentious topic being debated is the use of Bitcoin by government officials. El Salvador declared the BTC to be legal tender after receiving warnings from IMF and diverse criticisms from other financial organizations.

Ortiz Bollin stated, “It’s a surprise that they aren’t willing to go this way,” referring specifically to the refusal by the Salvadoran government to enter into a debt refinancing programme with the IMF.
The official believes that a new program with the Fund “would unlock other multilateral financing and potentially market financing that is badly needed.”

The Flipside

• El Salvador might give up Bitcoin by signing a new IMF program.
• With bitcoin trading this week at around $30,000, less than of half its value from November’s all-time high of $68,000, the Salvadoran government’s bid on the cryptocurrency appears to have backfired.
• This loss, along with the implied effect on the tight finances of the country adds a lot of risk and closes off avenues for financing.

Why you should care

• The IMF recognizes that El Salvador has managed to recover quickly from the ravages of the pandemic, due to “robust external demand, resilient remittances, and a sound management of the government to reduce the harmful effects of the crisis”.

The government of President Nayib Bukele and the IMF have so far had a strained relationship due to the organization’s criticism of the country’s financial policy, especially with it tied to the fate of Bitcoin.

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