El Salvador’s international bonds have staged a strong comeback in 2023 after plunging last year, posting returns of around 60% so far this year. The bonds have rebounded amid improved economic conditions and investor sentiment.
The small Central American nation made headlines in 2021 when it became the first country to adopt bitcoin as legal tender. But the move added to existing economic uncertainties and fiscal challenges.
As a result, the value of El Salvador’s bonds dropped to as low as 25 cents on the dollar last summer. Investors worried the government might struggle to meet debt obligations.
However, the bonds have rallied significantly in the first half of 2023. For example, the price of bonds maturing in 2025 has jumped from around $0.27 a year ago to the current trading price of $0.89.
The 2041 bond has also increased to $0.60 after trading below $0.30 last July. El Salvador’s sovereign debt is now offering yields ranging from 14% to 18%, making them the top-performing emerging market bonds so far this year.
The dramatic rebound stems from improved economic conditions and restored confidence in El Salvador’s ability to service its debt.
President Nayib Bukele’s administration made two unexpected bond buybacks late last year. Those purchases reduced El Salvador’s debt payments until 2027, easing investor concerns.
Hiring former International Monetary Fund (IMF) official Alejandro Werner as an advisor also signaled a shift toward more orthodox economic policies. His appointment revived hopes for a potential IMF financing deal.
Recent data shows El Salvador’s debt-to-GDP ratio has declined. It is projected to fall further this year before ticking up slightly in 2024. The government has also reduced total public debt by nearly $6 billion since last May.
According to portfolio manager Aaron Stern, El Salvador’s bonds were excessively discounted last summer. The prices now better reflect the country’s credit fundamentals and growth trajectory.
Some analysts say yields of 14% to 18% represent an attractive value for El Salvador’s bonds relative to other emerging market debt trading at higher prices.
The comeback allows El Salvador to maintain access to international capital markets critical for its dollarized economy. It marks a notable turnaround from dire predictions last year of possible default.
El Salvador adopted the U.S. dollar as legal tender in 2001. Without a sovereign currency, the government relies heavily on debt financing.
The bond rebound follows a turbulent period after El Salvador became the first country to accept bitcoin as legal tender in September 2021. The move added to concerns about economic mismanagement.
But Bukele’s administration has focused on restoring investor confidence and relations with the IMF. The government is seeking to boost growth while keeping debt sustainable.
If El Salvador continues prudent economic policies, analysts say its bonds could extend their rally. The country may also reach a long-elusive agreement with the IMF for a financing program.
This article is based on the original news published on Crypto.News.
Disclaimer: This news article is for informational purposes only and does not constitute financial or legal advice. It is important to conduct through research and consult with professionals before engaging in any investment or financial activities.
