- El Salvador's nine-month nationwide bitcoin experiment is struggling.
- Government bitcoin investment has halved Nationwide bitcoin adoption hasn’t really taken off and the country needs a ton of cash to quickly pay off its debt of more than $1 billion due next year.
- El Salvador is betting its economic rescue on Bitcoin but so far the gamble has not paid off as President Nayib Bukele had hoped.
The optics aren't good, though.
Negotiations with international lenders have stalled in part because of their reluctance to put money into a country that spends millions of dollars in taxes on cryptocurrencies prone to extreme price swings. Rating agencies including Fitch have cancelled El Salvador's credit Given the adoption of Bitcoin as legal tender there is uncertainty about the country's financial future. That means President Bukele is now more expensive to borrow much-needed cash.
El Salvador is in a very difficult position in terms of its financial situation. They have a lot of bonds that are trading at a steep discount to continue Sobrado.
The country's economic policy is essentially magical thinking said Frank Muci a policy researcher at the London School of Economics who has experience advising Latin American governments.
They've spooked financial markets and the IMF went on to say that Muci told CNBC that no one wants to lend money to Bukele unless it has an interest rate as high as 20% to 25%.
Mucci said the country is sleepwalking to a debt default.
But the tech-savvy millennial president who boasted on his Twitter bio that he's the coolest dictator in the world tied his political fortunes to this crypto gamble so in the long run there's a lot to like Big incentives to make it work -- and pay off the nation's debt in the meantime. Bukler will be re-elected president in 2024 for a five-year term.
The government’s cryptocurrency coffers have been cut in half The nationwide adoption of bitcoin hasn’t really taken off and the point is that the country needs a lot of cash to pay off its debt of more than $1 billion next year. This is because the price of Bitcoin has fallen by more than 70% Its November 2021 peak was more than 55% higher than when Bukele announced his plans.
Meanwhile El Salvador's economic growth has fallen sharply its deficit remains high and the country's debt-to-GDP ratio -- a key metric used to compare what a country owes -- is set to hit nearly 87 percent this year triggering Concerns about El Salvador. does not have repay its loan obligations.
Combine these economic woes with a new war on gang violence and you have everything you need for a nation on the brink of collapse.
On the surface the whole Bitcoin thing hasn't really paid off said London-based fintech data analyst Boaz Sobrado.
It’s not Bitcoin’s fault that governments are heading for financial collapse.
The government’s unrealized paper losses in bitcoin amount to about $50 million which the finance minister noted is less than 0.5 percent of the state budget. In total the entire experiment (and all its associated costs) is estimated to have only cost the government about $374 million. That's not much -- especially given the fact that El Salvador has $7.7 billion in bonds outstanding -- but it's relatively small for a $29 billion economy.
- Snapshot of the Salvadoran economy
The country was in a lot of trouble long before President Bukeler realized that Bitcoin was a magic panacea that could bandage long-standing economic vulnerabilities. World Bank expects El Salvador's economy to grow 2.9% this year 1.9% next year down from 10.7% in 2023 2021. But the growth itself rebounded from an 8.6% contraction in 2020. Its debt-to-GDP ratio is close to 90% and its debt is expensive at around 5% a year compared with 1.5% in the US. The country also has huge deficits - whether through tax increases or through El Salvador's Eurobonds struggled last year analysts at JPMorgan warned in a research note as S&P Global data reportedly showed the cost of insuring against sovereign defaults was hitting multi-year highs.- And the International Monetary Fund has warned that the country is on an unsustainable path with aggregate financing needs exceeding 15% of GDP from 2022 - with public debt on track to reach 20% of GDP in 2026 under current policies 96%.
- What they've done over the past three or four months is to implement Super expensive gasoline subsidies Mucci said he has expertise in economic diversification and public financial management having worked on applied research projects in El Salvador Venezuela and Honduras.
- This is a country with no direction in terms of economic policy. i mean they Don't know where they are going or what they are doing.
- I think it's a classic case of what he calls one day at a time. All of this comes as El Salvador faces multi-billion dollar debt repayments including $800 million in Eurobonds due in January.
El Salvador has been trying to secure a $1.3 billion loan from the IMF since early 2021 — an effort that appears to have been exacerbated by President Bukele’s refusal to heed the group’s advice to drop bitcoin as legal tender.This is related to Fitch's recent downgrade It is also attributed to El Salvador's difficulty in accessing multilateral financing and external market financing due to high borrowing costs and limited space for additional local market financing.
The president's efforts to consolidate power have also pushed up that risk premium.Bukele's New Ideas party controls the country's legislative assembly.
In 2021 the new parliament has come under fire after ousting the justice minister and top judges.
The move prompted the United States The Agency for International Development withdrew aid from El Salvador's national police and public information agencies and instead reallocated funds to civil society groups.
Furthermore El Salvador cannot support its finances by printing money.El Salvador dollarized in 2001 which means it dropped the local currency's colon in favor of the U.S dollar.
Only the Fed can print more dollars. At the same time its other national currency Bitcoin is being held in high esteem Because it is impossible to create coins out of thin air.
The bitcoin experiment
In September 2021 El Salvador became the first country to adopt Bitcoin as legal tender.The initiative involves the purchase of bitcoin with public funds as well as the launch of a national virtual wallet called chivo (Salvadoran for cool) which offers free transactions and allows fast cross-border Payment.
For a country with a predominantly cash economy -- about 70 percent of people don't have bank accounts credit cards or other traditional financial services -- chivo aims to provide easy on-ramp for those who have never been involved in the banking system.
The experiment also It involves building a nationwide infrastructure of bitcoin ATMs across the country and requiring all
businesses to accept the cryptocurrency.The president upped the ante in November when he announced plans to build a bitcoin city near the Conchagua volcano in southeastern El Salvador.
This Cities funded by bitcoin will offer significant tax breaks and geothermal energy spewing from a neighboring volcano will power bitcoin miners.
The government has spent about $375 million on the launch of bitcoin including a $150 million trust fund designed to instantly convert bitcoin to $120 Every citizen who downloads the chivo wallet gets a $30 bitcoin bonus (no small sum in a country where the monthly minimum wage is $365) and the roughly $104 million the government publicly admits to spending in bitcoin. Muci noted that those costs plus $50 million Unrealized losses on the country’s bitcoin portfolio mean the country has spent around $425 million to realise bitcoin.
But after nine months of betting on bitcoin nationwide it doesn't seem like it's delivering on many of its big promises right away.
President Booker on Twitter The app had 4 million users in January (out of a total population of 6.5 million) but a National Bureau of Economic Research report released in April showed that only 20 percent of those who downloaded the wallet went on to use its $30 bonus after spending.
The study is based on a A nationally representative survey involving 1,800 households.
Sobrado explained that in terms of actual penetration of Bitcoin transactions it appears to be quite low. There seems to be a problem with state-issued wallets.
A lot of people downloaded it but it was wrong. it's not true The best user experience.
Among those using government crypto wallets some had technical issues with the app.
Other Salvadorans have reported cases of identity theft in which hackers used their national ID numbers to open a chivo e-wallet to claim $30 worth of free bitcoins Offered by the government as an incentive to join.
Another hope for the chivo wallet is that it could help save hundreds of millions of dollars in remittance fees. Migrants remit or send home more
than 20% of El Salvador’s GDP and some households derive more than 60% of their income from this source alone. Existing services may charge 10% or more for international transfers that can sometimes take days to arrive and require physical pickup.
But in 2022 recent data shows that only 1.6% of remittances are sent through digital wallets.
In terms of merchant adoption a survey released in March by the El Salvador Chamber of Commerce and Industry found that 86% of businesses have never sold using Bitcoin.
They give people the purse they force businesses to accept but it's basically a no-brainer burger in my opinion who worked at the Growth Lab at the Harvard Kennedy School of Government. No one actually uses the app to pay in bitcoin.
People who use it mostly use Dollar.
Bitcoin City like the $1 billion bitcoin bond sale was initially shelved in March due to unfavorable market conditions.
If the president’s tweet is to be believed the government’s personal bitcoin investments are off the books by about $50 million. (None of these losses will be locked in until the country exits its bitcoin position.)
Ultimately El Salvador's problems have nothing to do with the currency Muci said.
These issues are related to security economic productivity and other things. And Bitcoin has nothing to do with anything he said.- Debt default unlikely
- El Salvador's big bitcoin gamble may be struggling right now but Sobrado told CNBC it's a definite win for bitcoin tourists. While they may have declined in unrealized losses on bitcoin investments the traveler said Sobrado. They attract a lot of Bitcoin believers and get a lot of money from these people. I think it's entirely possible that El Salvador has achieved what it wants to continue if you look at the unrealized loss as a marketing campaign Sobrado also pointed out Countries like Costa Rica spend billions of dollars on marketing campaigns. According to official government estimates tourism has grown by 30 percent since the Bitcoin law went into effect in September. The country's tourism minister also noted that 60 percent of tourists now come from the United States. Nor has the Bitcoin experiment damaged the president's popularity. Bukele's approval rating is over 85 percent thanks in large part to his tough leadership approach to crime. That's no small feat for a country that was more dangerous per capita than Afghanistan five years ago. Sobrador said Bukele remains one of the most popular presidents in power to this day. His approval rating of over 80% is something people in the rest of the world can only dream of. As for the country's heavy debt levels almost everyone agrees that President Bukele will do whatever he wants Enough cash needs to be raised to pay off the country's debt this year and next. Much of that incentive comes from the upcoming 2024 presidential election when Bukele is vying for another five-year term. JPMorgan sees high likelihood of $800 million bond maturity Paid in January to avoid a damaging credit event that could jeopardize his potential re-election prospects. While Fitch expects El Salvador to repay its short-term debt credit agencies warn that keeping up with its lending will prove more onerous this year progress. Mucci agreed that El Salvador would be able to cobble together the cash but warned that ultimately the country's public finances were unsustainable. If they didn't change things the plane would eventually crash Mucci said. If they don't raise taxes cut spending starts Be more disciplined. You know convincing the market that they are sustainable. He added that Bitcoin does not solve any important economic problems in El Salvador.
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