El Salvador's financial landscape has witnessed a notable improvement recently, with its dollar-denominated sovereign bonds showcasing an impressive rally.
The country's government bond, due in June 2035 with a 7.65% annual coupon, surged more than 200%, rising from 25 cents on the dollar in late July 2023 to 77 cents currently.
The rally in El Salvador's bonds coincides with a significant rise in Bitcoin's value, which has doubled from approximately $24,000 to $47,000 in the same period, buoyed by the anticipated approval of a spot Bitcoin Exchange-Traded Fund (ETF).
El Salvador Sees Profits From Bitcoin Investment
El Salvador made history by becoming the first country to adopt Bitcoin as legal tender in 2021. President Nayib Bukele, a staunch Bitcoin proponent, has stated that the move is designed to facilitate banking for Salvadorans and attract foreign investment. The Salvadoran economy expanded by 3.6% in the third quarter of 2023, marking the most significant growth since early 2022.
In early December, Bukele announced that the country's investments in Bitcoin had become profitable, suggesting a potential profit of $3.6 million if all Bitcoin holdings were liquidated. As of Jan. 9, 2024, the profits have escalated to $12 million, a 10.2% increase in the country's Bitcoin portfolio, based on purchase data from public tweets collected by Nayibtracker.com
El Salvador has also taken significant steps with the approval of a unique Bitcoin-denominated bond, popularly referred to as the "Volcano Bond."
This initiative follows the country's ambitious launch of a $1 billion Bitcoin mining project that leverages the nation's volcanic resources. The bond has received regulatory clearance, setting the stage for its introduction in 2024.
El Salvador Defies IMF Warnings, For Now
The decision to make Bitcoin legal tender in El Salvador has sparked considerable debate in economic circles.
The International Monetary Fund (IMF), in particular, has voiced concerns over the risks associated with this move, such as financial stability and consumer protection, urging El Salvador to reconsider Bitcoin's legal status.
The IMF also highlighted apprehensions over potential complications related to the issuance of Bitcoin-backed bonds.
"Relying on leverage and thus increasing public debt to invest in Bitcoin with the expectations of
its continuous rise in price, while also timing the market to acquire Bitcoin, is not a permanent
solution to ease financing constraints. If the use of Bitcoin increases significantly, it can risk the dollarization regime that has proven to be successful nominal anchor for the economy."
IMF's 2021 Article IV consultation with El Salvador
Despite receiving significant criticism and warnings from international financial entities such as the IMF, Bukele's strategy for El Salvador's economy appears to be paying off.
His decision to intertwine the nation's financial health with the performance of Bitcoin is currently reflected positively in the country's bond market rally and the reported profits from Bitcoin investments.
For now, the financial history seems to be proving Bukele right in his less than idyllic dealings with the IMF, but only time and data will tell if this will continue to be the case.
