El Salvador sees decline in ratings from Fitch amid Bitcoin adoption concerns

El Salvador, the first country to adopt Bitcoin as its legal tender, has seen a decline in long-term foreign-currency issuer default rating (IDR) designated by New York-based rating agency Fitch.

Fitch highlighted El Salvador’s reliability on short-term debts, high fiscal deficit, “limited scope for additional local market financing, uncertain access to additional multilateral funding and external market financing given high borrowing costs,” as some of the crucial reflectors of the recent downgrade.

The rating agency has downgraded El Salvador’s rating from B- to CCC citing Bitcoin adoption as one of the key reasons behind the lower ratings. Apart from Bitcoin adoption, the company also called attention to the country’s mounting debt concerns and high concentration of power in the presidency.

“…weakening of institutions and concentration of power in the presidency have increased policy unpredictability, and the adoption of bitcoin as legal tender has added uncertainty about the potential for an IMF program that would unlock financing for 2022-2023,” the report read.

Fitch Ratings is one of the “Big Three credit rating agencies” situated in the United States. The company has several kinds of credit ratings, ranging from AAA to D. Its CCC rating comes under ‘non-investment grade’, which means “Substantial credit risk” with “Very low margin for safety.”

Fitch’s rating on El Salvador comes as the country was about to issue its Bitcoin-backed bonds next month. However, the agency expressed concerns over El Salvador seeking external financing given the high uncertainty of returns. It noted:

“There is a high degree of uncertainty surrounding other sources of external financing, such as additional multilateral funding, given doubts surrounding an IMF program, as well as the capacity to issue “bitcoin backed bonds” through new distribution channels.”

Meanwhile, El Salvador president Nayib Bukele previously suggested that he has no plans to take rating agencies’ opinions into account after retweeting a similar report by Moody’s.

BREAKING: EL SALVADOR DGAF https://t.co/VuJ25PcvQL

— Nayib Bukele (@nayibbukele) January 17, 2022

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