Fitch downgrades El Salvador rating on debt concerns

New York-based Fitch Ratings has downgraded El Salvador’s long-term foreign currency issuer default rating (IDR) to “CCC” from its most recent rating of “B-.”

“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 [International Monetary Fund] program that would unlock financing for 2022-2023,” the prominent credit agency said in a February 9 statement.

According to Fitch, El Salvador is facing “heightened financial risks” related to factors including its reliance on short-term debt, an $800 million bond maturing in January 2023, a fiscal deficit that remains high and limited financing options in the local market. Fitch said it is also concerned about El Salvador’s debt sustainability in the medium term.

The reference to the International Monetary Fund (IMF) centers on negotiations with El Salvador for a reportedly $1.3 billion loan. But the status of those talks has been called into question, especially after IMF directors recently urged El Salvador to scrap Bitcoin as legal tender following a mission to the country. 

“The government has been in extended discussions with the IMF for nearly a year for a possible USD 1.3 billion three-year program; however, there are important differences between the two sides in many key areas, in Fitch's view,” Fitch said. “A deal would help cover the government's financing gap and likely unlock other multilateral loans. It would also help provide more clarity on the government's medium-term fiscal strategy.”

The downgrade announcement comes shortly after El Salvador’s finance minister Alejandro Zelaya told viewers of a local television program that the government is expecting to issue its first “bitcoin bond” next month. 

However, Fitch raised concerns about the uncertainty of external financing sources, including the bitcoin bonds. 

“There is a high degree of uncertainty surrounding other sources of external financing, such as additional multilateral funding, given doubts surrounding an IMF program, as well as the capacity to issue ‘bitcoin-backed bonds’ through new distribution channels,” Fitch wrote. It also called rates in the external bond markets “prohibitive.” 

According to Fitch’s rating scale, any rating BB or lower is considered “speculative grade,” which indicates a higher level of credit risk than “investment grade” ratings. A CCC rating signals “substantial credit risk.”