El Salvador tapped its thin foreign-currency reserves to repurchase debt at a discount, part of an effort to mitigate concerns about an imminent debt default as President
intends to seek re-election.
The government of the highly indebted Central American nation said it would buy back $566 million, paying bondholders 91 cents on the dollar for its bond due early next year and 54 cents for its 2025 bond. Each had an outstanding value of $800 million.
But investors are skeptical it will make much of a difference for an impoverished country at risk of default and whose embrace of bitcoin has put it at odds with the International Monetary Fund. After the buyback, El Salvador will still owe bondholders $667 million in January when its 2023 bond matures, and another $367 million in 2025.
El Salvador said it would pay $360 million in principal and accrued interest for the repurchase.
Mr. Bukele said the transaction was such a success that his government has decided to launch another offer for the remaining 2023 and 2025 bonds in eight weeks time. “El Salvador pays its debts!” he wrote on Twitter.
He didn’t say what funds El Salvador will use for the next tender offer.
The country faces unpalatable alternatives to offset a cash squeeze and meet debt payments, primarily because it has no access to international markets. Bilateral relations with the U.S. have deteriorated since Mr. Bukele took office in 2019, and negotiations for an IMF program stalled over policies implemented by Mr. Bukele to cement power and adopt bitcoin as legal tender.
Legislators of Mr. Bukele’s New Ideas party replaced the attorney general and magistrates of the Constitutional Court in 2021. The court was then stacked with loyalists who opened the door for Mr. Bukele to seek another term in 2024, undoing a constitutional ban on re-election.
As liquidity pressures intensified over the past year, Mr. Bukele has taken measures that have failed to cushion his government’s fiscal and financing needs. The planned placement of an exotic $1 billion bond that bet on a rise in bitcoin’s value stalled when the crypto asset’s value fell sharply.
Mr. Bukele has also spent hundreds of millions of dollars in taxpayer money buying bitcoin and rolling it out as a national currency, but adoption among Salvadorans has been slow.
Despite the setbacks, Mr. Bukele’s approval rating among Salvadorans is the highest of any leader in Latin America.
But the debt buyback is unlikely to dispel investors’ fears that the country is at risk of default.
The Institute of International Finance, a Washington-based association of financial institutions, estimates that El Salvador will be in dire straits by January as an IMF aid program looks unlikely and foreign-currency reserves are low.
“The fact that a country buys back debt at very low prices in a difficult economic and political situation is a sign that things are not going well,” said Sergi Lanau, the IIF’s deputy chief economist.
Fitch Ratings downgraded El Salvador earlier this month, warning that the buyback will “likely further weaken its already strained liquidity position” as the country faces a $1 billion funding gap between now and January.
Because El Salvador adopted the U.S. dollar as its official currency in 2001, it can’t resort to printing money to cover government spending. It has to obtain dollars through exports, remittances, or tourism, or by borrowing. Dollarization can hamper a country’s competitiveness, economists say, as it forgoes the advantages that a currency depreciation can have, such as making exports and tourism services cheaper.
While the buyback offer demonstrates willingness to meet obligations, “it definitely comes at the expense of liquidity that could be crucially necessary in the coming year,” said AJ Mediratta, a portfolio manager at Greylock Capital, which has participated in debt workouts involving over 30 countries and has exposure to El Salvador debt.
“With every month that passes, their options are increasingly limited,” Mr. Mediratta said.
To carry out the buyback, the government used the roughly $350 million that El Salvador received last year from the IMF as part of an initiative by the fund to supplement central bank reserves to help member countries cope with the costs of the pandemic.
“If they did this in conjunction with a more credible, transparent debt management approach, then it might be worthwhile. But on its own, it’s kicking the can down the road,” said Stuart Culverhouse, chief economist at London-based financial research firm Tellimer.
Both bonds rallied after the government disclosed plans to repurchase them in late July. Before then, the 2023 bonds traded for less than 65 cents on the dollar, while the 2025 bonds traded for less than 30 cents on the dollar.
“It shows a willingness to repay,” said Carlos de Sousa, emerging-markets fund manager at
a Zurich-based fund that owns El Salvador bonds.
Many emerging-market countries took advantage of deeply depressed bond prices during the Latin American debt crisis of the 1980s to reduce debt levels. Economists
and Jeremy Bulow described buybacks in 1988 as “a boondoggle benefiting a country’s creditors.” Cash-strapped nations would be better off negotiating for concessions like lower payments, rather than draining limited resources only to default later down the line, they said.
“Across Latin America, across the world, there’s this constant search for financial-engineering solutions to fundamental economic problems, and it never works. Buybacks are the prime example of this,” said Mr. Rogoff, who served as chief economist at the IMF and is currently a professor at Harvard University.
“Over the years, tens of billions of dollars have been wasted on buybacks,” Mr. Rogoff said in an interview.
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8