How El Salvador’s Bitcoin-Loving President Won Over Wall Street

by James · February 16, 2023

(Bloomberg) — For much of the four years since he won office, El Salvador’s President Nayib Bukele has relished his role as an anti-establishment warrior.

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He fired judges, pulled out of a regional anti-corruption pact, rejected the International Monetary Fund and adopted Bitcoin as legal tender. All the while he seemed completely indifferent to what foreign investors thought of him.

It turns out that the brash, ballcap-backwards 41-year-old president is a hit on Wall Street.

Salvadoran debt is the best performing emerging market this year after Lebanon. Even after a decline this week, the notes have returned 19%, compared with an average of 2.3% for other developing countries, according to a Bloomberg sovereign bond index.

El Salvador is one of the most extreme examples of how the world’s riskiest sovereign bonds have recovered after being oversold last year by money managers expecting a wave of defaults. But it is also a sign of how investors have warmed to Bukele. Instead of concerns that he’s running the economy into the ground, they gush about his embrace of fiscal prudence and largely overlook his autocratic tendencies.

The change in tone began when El Salvador repaid $800 million in bonds that matured last month and bought back $452 million in debt maturing in 2025, keeping to repeated promises that the nation would meet its obligations. Although there is still some skepticism about where Bukele will take the country with 6 million, for now he is no longer the risk he once was.

“We went from skepticism, from looking at the numbers and hearing his announcement to pay down the bond, to basically being surprised in a good way by his very strong willingness to pay,” said Federico Kaune, head of emerging markets at UBS Asset Management in New York.

Over the past seven months, bonds have reversed a decline that began when El Salvador adopted Bitcoin alongside the US dollar as its currency. Bukele has continued to ride the cyrptocurrency, even though its value fell more than 40% in the past year. This week, his government said it would open its second “Bitcoin embassy,” this one in Texas.

Bukele managed to spark a bond rally in July when he announced the buyback even as Bitcoin plunged. The rest of the notes due in 2025 have risen to 74 cents on the dollar after trading as low as 28 cents, according to data compiled by Bloomberg.

“We love his willingness to pay back,” said Christine Reed, regional specialist for Latin America at the New York asset management firm Ninety One.

There are many potential pitfalls ahead. Reed says El Salvador is unlikely to be able to generate enough reserves to carry out more buybacks in the future, while Kaune calls it a risky investment, plagued by a high debt load and questions about its fiscal outlook.

Another source of concern is Bukele’s tough approach to crime. Organizations including Human Rights Watch and the Inter-American Commission for Human Rights have criticized his policies as authoritarian and dehumanizing. He has also tangled with the United States, which has sanctioned some former government officials and condemned a decision to remove the attorney general and five top judges.

The government did not immediately respond to a request for comment. On Twitter, Bukele has noted how he defied widespread expectations that El Salvador would default on the bonds, saying international news outlets had written hundreds of articles predicting the nation would default in January.

For now, investors have largely shrugged off concerns about Bukele’s policies — his tough approach to crime has actually helped the economic outlook. Gross domestic product grew at a strong pace in 2022 due to “an unprecedented reduction in crime, and strong remittances and tourism receipts,” according to an IMF statement after an official staff visit on February 8.

The fiscal deficit is also narrowing, ending last year at 4.6% of GDP, down from 5.6% in 2021, according to data from Fitch Ratings.

“You can see they’ve already tightened their belts with finance spending,” said Oren Barack, managing director of fixed income at New York-based AGP Alliance Global Partners. “It was never about willingness to pay, it was about ability to pay. Now the two have joined.”