CNBC news agency reported that the countryEl SalvadorBet on Bitcoin Economic Survival But So Far Gambling has yet to pay off as President Nayib Bukele had hoped.
money in the fundcryptothe government’s halving And the nationwide adoption of bitcoin has not materialized. What is important is that the country now needs a lot of cash. to pay off more than $1 billion in debt next year. This problem arises because of the price of Bitcoin is down more than 70 percent from its November peak. 2021 and a decrease of more than 55%.
At the same time, the growtheconomyofEl SalvadorDecrease The deficit remains high and the country’s debt-to-GDP ratio remains high. which is the main metric used to compare what a country owes. It is expected to hit nearly 87% this year, raising concerns that El Salvador is not ready to pay off its loans.
“Bitcoin doesn’t work at all,” said London-based fintech data analyst Boaz Sobrado.
The government is on the verge of a financial disaster. which is not bitcoin’s fault
The government lost about $50 million in lower bitcoin prices, which the country’s finance minister estimates is less than 0.5% of the country’s budget. The cost (and all related expenses) was made out of the government budget of just about $374 million, according to estimates.
Fitch, the global credit rating agency It has knocked down El Salvador’s credit scores, citing uncertainty over the country’s financial future. due to bringing Bitcoins to be used legally This is because cryptocurrencies whose prices tend to fluctuate violently.
“In terms of the financial situation El Salvador is in a very difficult situation. They have a large number of bonds that trade. and severely reduced prices,” Sobrado said.
Frank Musi, a policy associate at the London School of Economics who has consulted governments in Latin America, said: “The country’s economic policy is a wonderful idea,” and “the country is about to default on its debts.”
However, the tech-savvy millennial president which once dubbed himself the “The coolest dictator in the world” on his Twitter profile has tied his political destiny to cryptocurrency gambling.
So President Bookle So there is a huge incentive to invest in crypto over the long term. Bukele will have to make arrangements to pay off his debts as the presidential reelection expires in 2024 in order to remain president for the next five years.
Salvador Economy Overview
The World Bank forecasts Salvador’s economy to grow 2.9 percent this year and 1.9 percent in 2023, down from 10.7 percent in 2021, but that growth is a rebound from an 8.6 percent contraction in 2020.
Its debt-to-GDP ratio is almost 90% and its debt is high at around 5% annually, compared to the United States’ figure of 1.5% annually. The country also has a large deficit. without plans to reduce debt Either by raising taxes or reducing spending.
In a research note from JPMorgan, analysts warn that El Salvador’s euro bonds have entered Last year, S&P Global data reported that insurance costs and defaults hit their highest levels in years.
Both JPMorgan and the International Monetary Fund have warned that the country is on an unstable path. It is expected that gross capital demand will exceed 15% of GDP from 2022 and public debt will reach 96% of GDP by 2026 if implemented under current policies.
“In the last 3-4 months What they do is use gasoline subsidies. which is very expensive,” said Musi, who specializes in economic diversification and managing public finances. and participated in an applied research project for El Salvador.
“This is a country without the rudder in terms of economic policy. It means they don’t know where they are going or what they are doing. like doing it every day,” he said.
All of this comes as El Salvador faces an imminent billion-dollar debt deadline. This includes having to pay $800 million in euros due in January. 2023
El Salvador has been seeking a $1.3 billion loan from the IMF since early 2021, and President Bookle has refused to comply with the organization’s recommendation to abolish bitcoin as a legal currency.
In addition, El Salvador cannot print cash to fund the country’s finances. Since El Salvador converted to the dollar in 2001, that means it abandoned its local currency, the colon, in favor of the US dollar. Therefore, there is only the Central Bank of the United States. that can print more dollars
meanwhile Other national currencies like Bitcoin It can’t be rebuilt from the air either.
bitcoin trial
In September 2021, El Salvador became the first country to legalize bitcoins.The initiative involves buying bitcoins with public funds. As well as the launch of a national virtual wallet called “chivo” (Salvador slang for “cool”) that offers zero-fee transactions and enables seamless cross-border payments. fast
For a country with a predominantly cash economy, where approximately 70% of its people do not have bank accounts, credit cards, or other traditional financial services, chivo is a convenient option for those who have never been part of the banking system.
The trial also involved building infrastructure across the country. by creating bitcoin ATMs across the country and require every business to accept cryptocurrencies.
The president increased the ante in Nov. 2021. when he announced plans to build The “Bitcoin City” next to the Conchagua Volcano in southeast El Salvador. Cities funded by bitcoin will be able to provide significant tax breaks. From using the geothermal energy rolling out of the volcano to mine bitcoins.
In total, the government has spent about $375 million on bitcoin launch. Divided into trust building, $150 million to give a bonus of 30 bitcoins to each citizen who downloads the chivo wallet (there is no small amount in countries where the minimum monthly wage is 365 dollars) in money. $120 million and approximately $104 million that the government has publicly admitted to spend in bitcoin.
Musi noted that these expenses, plus an unrealized $50 million loss in the country’s bitcoin portfolio. This means that the country has spent about $425 million on “Make Bitcoin Happen”
The president tweeted in Jan. The app has 4 million users (out of a total population of 6.5 million), but a report published in April by the U.S. National Bureau of Economic Research found that only 20% of people who downloaded their wallets “applied to the app”. Still moving after spending $30 in bonuses, the research was based on a survey of 1,800 nationally representative households.
Looking at the actual bitcoin transaction numbers, it appears to be pretty low,” with issues with state-issued wallets. Many people have downloaded it. but it’s a bug which is a bad user experience
Among those who use government crypto wallets Some people have technical issues with the app. Other Salvadorans Report identity theft cases In which hackers use a national ID number to open a chivo e-wallet to claim the $30 worth of bitcoins offered by the government for free. as an incentive to join
Another hope for the chivo wallet is that it will save hundreds of millions of dollars in transfer fees. Remittances or remittances sent home by immigrants It accounts for more than 20% of El Salvador’s gross domestic product.
By 2022, the latest data shows that only 1.6% of money transfers are made through digital wallets.
Bitcoin City Building Project Suspended Along with selling $1 billion worth of bitcoin bonds. The project was temporarily suspended in March. due to unfavorable market conditions
A default is unlikely.
El Salvador’s big bitcoin bet may be struggling at the moment, but Sobrado told CNBC it has undoubtedly won in terms of attracting bitcoin visitors.
“While they may be affected by the price drop that may lead to unrealized losses in their investments. But their bitcoins are growing exponentially in terms of tourism,” Sobrado said.
“They attract a lot of people who believe in bitcoin and have a lot of capital from them. And I think it’s very possible that if you think of the unrealized loss from the marketing campaign. But El Salvador has achieved what it wants,” Sobrado continued. And noted that other countries like Costa Rica spend billions of dollars on marketing campaigns.
The tourism industry is up 30% due to the bitcoin law that came into effect in September 2021. According to official government estimates The country’s tourism minister also noted that 60% of tourists now come from the United States.
for the country’s depressing debt level Virtually everyone agrees that President Bookle will do whatever it takes to raise enough cash to offset what the country owes this year and next. Much of the motivation comes from the upcoming 2024 presidential election, in which Bukele is vying for the presidency for another five years.
JPMorgan It sees a “high probability” of paying $800 million in bonds in January in order to “avoid disruptive credit events that could halt his prospects for re-election,” although Fitch expected it. El Salvador is able to pay off its debts in the short term.
Musi said El Salvador would be able to gather cash to pay for it. But he cautioned that ultimately the country’s public finances would not be sustainable. If things don’t change, such as not raising taxes, reducing spending, becoming more disciplined. And Bitcoin can’t solve El Salvador’s major economic problems.
