China orbits El Salvador’s economy as country moves towards crypto dive | Bitcoin
While crypto-Twitter erupted with apocalyptic memes about the bankruptcy of cryptocurrency exchange FTX and the sharp drop in the price of bitcoin, one account has been particularly silent on the subject.
Unlike previous crashes, the president of El Salvador, Nayib Bukele, who made bitcoin legal tender a year ago, did not urge his followers to “buy the dip.” The laser eyes, popular among cryptocurrency traders, have long since been removed from his Twitter profile.
On the day that FTX declared insolvency, he announced that the country would sign a free trade agreement with China. His vice president, Félix Ulloa, said China had offered to buy the country’s $21 billion in foreign debt as part of the deal.
The Central American country of 6.5 million is in a tough economic position. In January, it must pay €667 million ($688 million) for a Eurobond amortization. At the beginning of the year, Bukele promised that his country would issue bitcoin-denominated bonds to pay off national debt and predicted that the price of bitcoin would reach $100,000.
But the so-called “volcano bonds” never materialized, and today the bitcoin price hovers around $16,000. The best tracker of the president’s opaque trading estimates that he has spent over $107 million on 2,381 bitcoins. Today, the investment is worth just over 40 million dollars.
“If Bukele dreamed that he could create a different and innovative political economy, against the advice of the IMF, that dream has failed,” said Luis Membraño, a Salvadoran economist. “There are no easy options, no shortcuts.”
The bitcoin losses are relatively insignificant to the overall debt, but the president’s determination to flout advice from the IMF to backtrack on his bitcoin policy has spooked international markets. When rating agency Moody’s announced a downgrade of the country’s credit in January, Bukele tweeted: “Breaking: El Salvador DGAF”, an acronym for “don’t give a fuck”. Now Fitch says that some form of default is likely in January.
With rising inflation, a looming recession and a worsening financial situation, El Salvador cannot turn on the printing press because it adopted the US dollar as its national currency in 2001. Instead, the government has dipped into reserves to cover the fiscal gap. If the situation worsens, the country may eventually be forced off the dollar, according to Membreño.
However, accepting debt financing from China would mean a definitive break from the US and move the country closer to China, Russia and Turkey, according to Membreño. “It would represent a total overhaul of El Salvador’s foreign policy,” he said.
That funding would not come cheap, according to Evan Ellis, a senior fellow at the Washington, DC-based Center for Strategic & International Studies. “China acts as a lender, they make good money from these deals,” he said. “But they often find a way to link the loans to long-term commercial and strategic benefits that open the way for Chinese companies.”
Since El Salvador ended relations with Taiwan in 2018, China has agreed to build a stadium and a library in the country, but its plans to turn the port of La Unión into a logistics hub have stalled.
Closer ties with China may also suit Bukele’s own ambition. He has attracted criticism from the US and Europe for seeking re-election in 2024 in violation of the country’s constitution.
“When populist governments, from the left or the right, come to power, China acts as a non-judgmental underwriter,” Ellis said. “China may give Bukele economic independence for being authoritarian and going against the constitution.”
With an approval rating of around 90%, Bukele remains the most popular president in Latin America, based on a heavy-handed approach to law and order and regular attacks on the old political elite.
When Salvadorans elected him in 2019, after decades of corruption by the traditional parties and spiraling gang crime, many felt they were in the last chance.
But as a bitcoin gambler, Bukele has neither known when to keep them nor when to throw them away. Closer ties with China will represent another roll of the dice.