El Salvador Needs a Deal with the IMF to Improve Its Credibility – Ortiz-Bollin

El Salvador Needs a Deal with the IMF to Improve Its Credibility – Ortiz-Bollin

  • 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.
  • Talks between the Salvadoran government and the IMF were resumed this week, and the discussion will include the topics of money laundering and accountability for the use of public funds.

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.

But she cautioned that "it's more about the certainty on the policy predictability that comes with an IMF agreement, which is something that the country is significantly lacking right now."

The yield on the external debt of the Central American country in relation to U.S. Treasury bonds reached an all-time high spread of more than 2,600 basis points this week.

El Salvador does not have access to international financial markets, so its payment capacity is greatly reduced. 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.

The credit agency reported this week that it had resumed talks with the government of Nayib Bukele after a long hiatus. Various topics are being covered, including the pace and composition of fiscal consolidation, anti-money laundering prevention measures, fiscal transparency, and the management of public funds.

The use of Bitcoin (BTC) by the government is another contentious issue being discussed. El Salvador converted the BTC into legal tender in September despite warnings from the IMF, and varied criticism various internal and external financial organizations.

"It is a surprise to us that they're not willing to go this path," Ortiz-Bollin said, referring to the Salvadoran government's refusal to sign a new debt refinancing program 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.”

On the Flipside

  • The signing of a new program with the IMF would imply that El Salvador would give up Bitcoin.
  • 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.
  • These losses, and the implied impact on the narrow finances of the country, add a great deal of risk to the country, and has closed come avenues of 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.