Fitch Ratings downgraded El Salvador's long-term foreign currency issuer default rating (IDR) to "CC" from "CCC," saying that the country faces a "dire" liquidity situation as a January bond maturity deadline approaches.
The move reflects Fitch's view that "El Salvador's tight fiscal and external liquidity positions and extremely constrained market access amid high fiscal financing needs and a large $800 million external bond maturity in January 2023 make default of some sort probable."
Fitch estimates that El Salvador will need about $3.7 billion in financing between now and January 2023, and that it has an "unidentified financing gap" of close to $900 million.
"El Salvador's liquidity situation is dire ahead of the January 2023 Eurobond payment," it wrote.
El Salvador, which made bitcoin legal tender in September 2021 alongside the U.S. dollar, has been dealing with broader financing concerns as it moves closer to its next debt repayment date. The country is also facing significant unrealized paper losses on its bitcoin purchases, which to date total 2,381 based on available public information.
Reuters reported in July that the Central American country would use $560 million to fund a voluntary bond repurchase offer for part of its debt due between 2023-2025, but then El Salvador's president Nayib Bukele tweeted out a press release on September 12 indicating that the country had officially launched the offer with a buyback amount of $360 million.
According to Fitch, El Salvador's buyback plan "will likely further weaken its already strained liquidity position."
"The size and scope of the transaction does not materially alter the probability of default in Fitch's opinion," Fitch wrote.
Fitch previously downgraded El Salvador's IDR in February, at the time citing concerns about the uncertainty of external financing sources such as the country's planned "bitcoin bonds" that it has yet to launch.
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