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El Salvador’s Bitcoin bonds have emerged as a top trade in emerging markets, bolstered by the potential return of Donald Trump to the White House. This development comes as bond investors speculate that a Trump presidency could unlock billions of dollars in funding for El Salvador from multilateral institutions like the International Monetary Fund (IMF), which have been hesitant to lend to a country that uses Bitcoin as official currency.
Impact of a Potential Trump Presidency
Chris Preece, a portfolio manager at Pictet Asset Management, highlighted the scenario: “El Salvador is a clear trade. If Trump gets in, the impediment that Bitcoin has been for El Salvador’s relationship with the IMF becomes less of an issue.” This sentiment has led to significant returns for investors, with El Salvador’s dollar bonds handing out returns of 2.8% since late June when President Joe Biden’s performance in debates fueled speculation about Trump’s chances in the upcoming election.
Bond Market Performance
El Salvador’s dollar bonds have shown positive movement, particularly those maturing in 2035, which rose by 0.2 cents on the dollar. This improvement aligns with broader expectations in emerging markets that a Trump victory could strengthen the dollar while adversely impacting Asian currencies and the Mexican peso due to Trump’s aggressive trade and immigration policies.
Bukele’s Political Maneuvering
President Nayib Bukele, reelected this year with nearly 85% of the vote, has had a contentious relationship with the current US administration. Bukele’s ties with Trump are evident; he has openly supported Trump on social media and invited prominent conservative figures, including Trump’s son, to his inauguration. These connections could play a crucial role in improving El Salvador’s standing with the IMF if Trump returns to power.
The Path to an IMF Deal
For months, investors have speculated that Bukele is delaying actions in anticipation of Trump’s return. While some investors are wary of Trump’s fiscal policies, others believe that a Trump presidency could finally secure an IMF deal for El Salvador, which has been stalled for three years due to the country’s adoption of Bitcoin as legal tender. Arif Joshi, a fund manager at Lazard Asset Management, stated, “I am much more sympathetic to the El Salvador view than any of the other trades because there’s actually a path to get an IMF deal.”
IMF and Bitcoin
The IMF has consistently warned about the risks associated with Bitcoin, urging El Salvador to abandon its cryptocurrency experiment to secure funding. However, ongoing talks aim to reach a new agreement to strengthen public finances, improve reserve buffers, and boost productivity. An IMF representative noted, “Addressing risks arising from the Bitcoin project is a key element of our discussions.”
The Broader Financial Picture
El Salvador’s debt burden stands at around 70% of GDP, with public finances remaining fragile. A deal with the IMF could provide further funding tied to economic reforms, offering investors confidence in the country’s debt management. According to Fitch Ratings, the fiscal deficit is projected to decline to 3.9% of GDP this year from 4.7% in 2023. However, Moody’s Ratings emphasized the need for a strategy to address high funding costs and meet medium-term debt obligations.
Investor Sentiment
Investors remain cautiously optimistic about El Salvador’s willingness to pay its debts, though they are keenly awaiting concrete actions toward securing an IMF deal. Anthony Kettle, a senior portfolio manager at RBC BlueBay, remarked, “They have shown a very high willingness to pay, but where they have underwhelmed has been on their willingness to go and get an IMF deal. That’s the next piece that people wanna see.”
As the political landscape evolves, the interplay between Bukele’s administration, Bitcoin adoption, and potential shifts in US policy under a Trump presidency will significantly impact El Salvador’s financial future and its standing in the global bond market.
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