El Salvador’s Bond Rally Offers 70% Returns Despite Bitcoin Adoption Concerns: Report

Key Points:

• El Salvador’s bond rally offers 70% returns, the best among emerging markets this year.
• President Bukele’s hard-line stance on gangs has reduced crime and influenced regional politics.

Bloomberg reported El Salvador’s bond rally is attracting investors with 70% returns, the best among emerging markets this year, despite concerns over Bitcoin adoption, human rights abuses, and limited dollar reserves.

El Salvador recently gained attention for adopting Bitcoin as a legal tender in 2021. The country’s President, Nayib Bukele, has been a vocal supporter of cryptocurrency and has worked to make El Salvador a hub for cryptocurrency and blockchain technology. However, the adoption of Bitcoin has been met with concerns over alleged human rights abuses and the country’s limited dollar reserves.

Despite these concerns, El Salvador’s bond rally is proving too lucrative for investors to resist. Eye-popping returns of 70%, the best among dollar bonds from emerging markets this year, are attracting once cautious investors or avoiding the securities altogether. Companies like JPMorgan Chase & Co, Eaton Vance, and PGIM Fixed Income have recommended or bought the debt, betting it will continue climbing.

El Salvador has benefited from proactive and prudent management of its balance sheet, including a debt buyback during the second half of 2022 and material pension reform. Mila Skulkina, a money manager at Lord Abbett, said that El Salvador’s fiscal accounts are positive, and President Bukele has consistently told bondholders that he’s serious about paying the debt.

Bukele’s optimism is gaining acceptance from money managers and peers in Latin America, despite previous dismissal as an anti-establishment maverick. His hard-line stance on gangs has reduced crime and influenced regional politics, while his commitment to paying bondholders has made him a favorite among emerging-market investors.

However, El Salvador’s medium- and long-term risks remain, and the country faces a series of issues, including limited dollar reserves and questions over whether it can access global capital markets. Due to these risks, Claudia Calich, the head of emerging-market debt at M&G Investments, has stayed neutral on the credit.

Despite these challenges, El Salvador’s bond performances compare favorably to a 6.6% average return across an index of developing nations.

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