El Salvador bond spreads widen sharply after reelection ruling, bitcoin move: El Salvador bond spreads are on track for their biggest weekly blowout in almost a year as a rocky debut to the country’s bitcoin experiment exacerbated fears over a court ruling that allows President Nayib Bukele to run for reelection in 2024.
Government bond spreads to comparable US Treasuries rose above 900 basis points, jumping nearly 100 bps this week alone to match the largest weekly increase since last October.
The widening spreads and lower bond prices coincided with investor fears that Bukele’s accumulation of power may lead to increased spending and further hurt his relationship with the United States, a key ally if the Central American nation is to reach a $1 billion loan agreement with the International Monetary Fund.
“We continue to see more probability of downside given the current administration’s uncompromising political agenda in defiance of the US as well as an ever-pressing need to maintain high spending to keep popularity levels high,” Nathalie Marshik, head of EM sovereign research at Stifel, wrote in a client note this week.
El Salvador’s top court ruled on Sept. 3 that the country’s president can serve two consecutive terms, sparking condemnation from the US government.
The Central American nation also rolled out a law this week adopting bitcoin as legal tender alongside the US dollar, though the start of the experiment was marred by protests, technological glitches, and a dip in the cryptocurrency.
The government’s push to adopt bitcoin increases the risk that it could run out of cash.
“The risk of fiscal unsustainability could increase as fiscal revenues would be exposed to the evolution of the exchange rate USD/Bitcoin,” said Fabiano Borsato, chief operating officer at Torino Capital in New York.
“If, for example, taxes are paid in Bitcoins while expenditures remain primarily in dollars, there would be significant pressure on the exchange market and the level of international reserves.”
Bitcoin is down over 12% this week, its largest weekly loss since May.
However, the low bond prices and bruised investor sentiment offer a good reward if the government decides to commit to an IMF deal.
Bank of America analysts, overweight on Salvadoran foreign debt, said this week that “the government’s strong political capital and high popularity are valuable assets given that El Salvador needs to deliver a large fiscal adjustment” while highlighting above-consensus growth in gross domestic product and recent fiscal outperformance.
They did note, however, that the adoption of bitcoin as legal tender was an added downside risk for investors.