By
Temitope Olatunji
April 26th, 2024
As an emerging economy, El Salvador believes the best way to hedge against the core fluctuations brought on by the US dollar devaluation can be effectively mitigated with Bitcoin.
El Salvador’s junk-rated bonds have defied expectations by experiencing a remarkable surge, mirroring the extraordinary ascent of Bitcoin (BTC) throughout 2023. According to reports, El Salvador’s bonds have defied all odds by surging 62%, now trading at 72 cents on the dollar. Bitcoin, the world’s leading cryptocurrency, experienced an impressive 79% rise during the same period.
The surge in El Salvador’s bonds has even outpaced the performance of the Invesco Emerging Markets Sovereign Debt ETF (PCY), one of the largest holders of the country’s debt.
Bitcoin Adoption and ETF Surge
The recent global trend of Exchange-Traded Funds (ETFs) fueled by BlackRock Inc (NYSE: BLK) is at the heart of this exponential surge in El Salvador’s bonds. As the application for spot Bitcoin ETFs expanded, the price of Bitcoin saw a notable upward trajectory. This rally, in turn, spurred investor confidence and may have increased the demand for El Salvador’s sovereign bonds.
As investor appetite for high-yield ventures surges, it can be deduced that El Salvador’s junk-rated bonds are not an isolated incident but rather a part of a larger market-wide trend. Junk-rated bonds of other countries, including Turkey, Argentina, and Nigeria, have also outperformed investment-grade bonds early this year.
El Salvador Bitcoin Diversification Plans Faced Resistance
El Salvador’s decision to embrace Bitcoin as a legal tender has been met with skepticism and opposition from rating agencies and the International Monetary Fund (IMF) from the onset. The IMF opposition to El Salvador’s Bitcoin adoption dates back to the early days when the country tapped the digital currency as its legal tender.
The IMF has urged authorities to reconsider their plans to expand government exposure to Bitcoin due to legal risks, fiscal fragility, and the speculative nature of crypto markets. Besides the IMF, other global financial institutions like the World Bank and Fitch Ratings have also criticized and downgraded the economic viability of adopting Bitcoin.
In 2021, S&P also expressed skepticism over El Salvador’s decision to adopt Bitcoin as legal tender, citing immediate negative implications for the country’s credit. The rating agency raised concerns about the risks outweighing the potential benefits of embracing cryptocurrency.
As an emerging economy, El Salvador believes the best way to hedge against the core fluctuations brought on by the US dollar devaluation can be effectively mitigated with Bitcoin. Shortly after it made BTC legal tender with some accumulations sanctioned by President Nayib Bukele, Bitcoin slipped into its long winter with price not recovering as consistently as it has done in the past few months.
With top projections for Bitcoin to outperform traditional assets in the long term, Bitcoin proponents are convinced El Salvador will be the one to laugh last. Thus far, the country has been able to meet its debt obligations and the current growth in its bonds can help restore investor confidence to an extent.