Moody’s poor rating of El Salvador has a negative impact on the country’s economy, owing in part to the government’s approval of legislation making Bitcoin legal money in the country, the rating agency stated on Friday. Moody’s Poor Rating of El Salvador Has A Negative Impact Following Bitcoin Law In its rating action, Moody’s downgraded El Salvador’s long-term, foreign-currency lender, and senior unsecured ratings from B3 to Caa1. The agency claimed the Bitcoin legislation and other actions indicated “weakened governance in El Salvador, increasing tensions with foreign partners notably the United States – and endangering progress toward an agreement with the IMF (International Monetary Fund).” The rating action also stated that the combination of circumstances might jeopardize El Salvador’s ability to “access sufficient external funding ahead of bond redemptions,” which begin in January 2023. The Bitcoin regulation, which takes effect on September 7, requires shops to accept Bitcoin in addition to US dollars. The law was enacted by a supermajority in El Salvador’s legislature on June 9, with 62 members voting in favor of the measure, 19 opposed, and three abstaining, but it has been met with fierce opposition, with some opponents claiming it breaches the country’s constitution. Rationale For A Neutral Perspective Moody’s believes that the risks to El Salvador’s credit profile are tilted to the downside, which is reflected in the negative outlook. This is based on Moody’s assessment that the fiscal position remains vulnerable to financing shocks, which could jeopardize the sovereign’s repayment capacity ahead of the challenging redemption schedule on its external market debt, which begins in January 2023, especially if market access remains constrained. Although the authorities are anticipated to continue adopting steps to achieve additional, gradual fiscal reduction, public debt ratios remain excessive at 89.2 percent of GDP at the end of 2020. Given substantial financing requirements that Moody’s forecasts will exceed 15% of GDP in 2022, as well as anticipated debt redemptions in the following years, sourcing sources of financing against a backdrop of limited liquidity will be a critical credit problem. Even if a deal with the IMF opens the door to further international funding, implementation difficulties and policy blunders might weaken market confidence, thereby raising risks for bondholders.
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