Moody’s downgrades El Salvador’s long-term foreign currency issuer rating, and it has a Bitcoin connection

Moody’s, a popular financial credit rating business has downgraded El Salvador’s long-term foreign-currency issuer and senior unsecured ratings to Caa1 from B3. The rating group also lowered El Salvador’s foreign-currency country ceiling to B2 from B1. It said the current outlook remains negative towards the small Central American nation.

Moody’s cited two key reasons for the downgrade, the first being deterioration in the quality of policymaking in the country and the upcoming debt amortization schedule starting from 2023. The official reasons read,

• Market access for the sovereign is likely to remain constrained ahead of a challenging debt amortization schedule beginning in 2023.
• A deterioration in the quality of policymaking has intensified implementation risks to the authorities’ fiscal adjustment plans and increased uncertainty about financing prospects.

The agency believes fiscal position remains nvulnerable and susceptible to financing shocks that could pose challenges to El Salvador loan repayment capacity. The report also cited that uncertainty around IMF’s financing aid could lead to a liquidity crunch for the nation.

Moody’s Call El Salvador’s Bitcoin Adoption “Controversial”

Moody’s report went on to shed light on governance issues in the country that have weakened its relation with international partners. The report calls the country’s decision to adopt Bitcoin as a legal tender “controversial” and something that raised tensions with the international partners. The jeopardized tensions with IMF raise the risk for El Salvador’s need to access sufficient external financing ahead of bond redemptions beginning in January 2023.

El Salvador created history on June 9 after it passed the Bitcoin bill to adopt BTC as a legal tender. However, the adoption of such volatile assets didn’t go down well with the likes of IMF and World Bank. The international financial body believes Bitcoin poses a great financial risk for the Latin American nation.

Moody’s also said if the country work towards consolidating central government finances and reduce its financial needs along with the redemption of external market debt, the country’s rating could be upgraded again.