El Salvador | Low IMF risks

Siobhan Morden | March 7, 2025

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

There has been some confusion after recent reports of Bitcoin accumulation by El Salvador that might run afoul of its program with the International Monetary Fund. The IMF has provided reassurance that El Salvador is in compliance but only after some damage to the Eurobond curve with El Salvador widening out toward recent worst levels. This setback maybe argues for better communication.  But it does not negate the commitment from El Salvador to the IMF program after months of negotiations and a priori measures including Bitcoin restrictions. The wider spreads look like opportunity.

The release of the International Monetary Fund staff report on El Salvador shows all the details on the Extended Fund Facility program. It confirms a fully funded program with no plans for Eurobond issuance until 2027 and clear focus on fiscal adjustment and good governance as the backbone of the program. The pre-conditions already build on a track record of commitment to the IMF program. This should lower execution risks. This should also unwind the recent pessimism with full recovery back to recent low yields and strong supply-and-demand dynamics that reinforce attractive carry returns.

The recent headlines about adding bitcoins to the Bitcoin Strategic Reserve Fund triggered some confusion about conditions attached to the country’s International Monetary Fund program. The program looks for “zero voluntary accumulation of BTC by the public sector, as per TMU (continuous ceiling).” But the strategic reserve may just be following the program guidance on consolidating the bitcoins among government agencies while improving data transparency about the composite holdings. IMF communications director Julie Kozack provided reassurance that

“Under the program, the government has committed to not accumulate further bitcoin at the level of the overall public sector and the authorities have confirmed that these are consistent with the approved program conditionality.”

This would suggest more of a communication problem than a compliance problem with the IMF program. This also shouldn’t distract on the otherwise positive momentum for program compliance.

There is much room for optimism in the details of the IMF program. It is unusual that a program kickstarts with so many pre-conditionalities and prior actions. This not only removes the initial challenges but, more importantly, also shows the commitment of the Bukele administration to an IMF program. The lengthy nearly two years of negotiations show the effort to deliver on the pre-conditions and the consensus across the Bukele administration. Some initially high deal risk now converts into low execution risks. The high approval ratings, majority congressional support and growth-friendly approach should further improve execution risks as well as multilateral technical support on the good governance criteria. The IMF summarizes the situation:

“Risks to the program arise from challenges in implementing the ambitious fiscal adjustment and structural reform program amidst an increasingly uncertain economic backdrop and rigidities posed by El Salvador’s dollarization regime. Support for the program at the highest political levels, program design features, including backloaded disbursements, and agreed contingency planning are important risk mitigating factors. The proposed program poses key reputational and business risks to the Fund, although these are mitigated by strong focus on governance and transparency reforms, recent amendments to the Bitcoin legislation in line with Fund policies, and the strong popularity of the administration, which strengthens capacity to deliver program objectives.”

The more difficult part of any IMF program is the political cost of fiscal austerity. There was also the additional obstacle of backtracking on Bitcoin, which may not have a political cost for the population, but it certainly was a personal cost to the Bukele administration.  On both these fronts, there was prior action from the Bukele administration with approval of an austere 2025 budget and the imposition of Bitcoin restrictions. The IMF cites “reputational and business risks to the Fund” but also recognizes that many of these risks were alleviated on the prior conditions.

The composition of the fiscal adjustment is purposefully “growth friendly” with a reduction of bloated 10%-of-GDP public payrolls, continuing high capital expenditure and social spending and more efficient tax collection with the informal economy. The wage restraint will focus on elimination of vacant positions and salary restraint on high income earners. There are no controversial tax hikes and instead a strategy of building on the track record of broadening the tax base. There have already been efforts to reduce the payrolls last year and an austere 2025 budget approved before finalizing the IMF program. The high 85% approval ratings for President Bukele should also provide a buffer with a pro-investment push to sustain GDP growth around 2.5%. This is the least controversial strategy for fiscal adjustment but yet 1.7% of GDP—of the 3.5% of GDP cumulative adjustment—is front-loaded this year to maximize the commitment and establish a credible track record. This basically represents El Salvador’s own economic program with IMF financial support and technical guidance to improve data transparency, good governance criteria and overall execution risks.

It is the same motivations that pushed El Salvador into an IMF program that should ensure its success.  This is what the critics don’t understand. The good governance criteria are exactly the credibility boost necessary to attract foreign direct investment as well as the fiscal anchor for reassurance of economic stability. As the IMF notes,

“With net FDI inflows consistently lower than the CAPDR’s median, it remains critical to encourage foreign investment through market-friendly reforms and private sector-driven initiatives—including from the diaspora. The authorities have an ambitious agenda to improve tourism infrastructure and advance digital technology capabilities, which should be completed with lower administrative barriers, modernized regulatory frameworks, and improved access to capital markets, especially micro, small, and medium enterprises.”

There are two initial quarterly IMF reviews that then shift to semi-annual reviews. The data watch will focus on the monthly fiscal data and specifically compliance of the wage reductions. It’ll be headline watch on the other good governance criteria. But, again, the prior actions already demonstrate a track record of commitment on both these fronts that should further benefit from multilateral technical support.  Again, the IMF:

“After successfully addressing the country’s security challenges, the Bukele administration has vowed to make fixing the economy the key objective of its second term.”

This first stage should imply low execution risks for the IMF program and improving relative value due to the recent weakness. The recent IMF reassurance over program compliance only validates all the other pre-signaling from the Bukele administration for commitment to a formal program. This should allow for a recovery to the recent yield lows and reinforce price stability on continuing high carry returns. The supply-and-demand dynamics should also remain supportive with a fully funded program through next year and Eurobond market re-entry for a small $600 million in 2027 at the final stage of fiscal adjustment. These potential carry returns are not the same alpha returns in 2023-2024; however, 9% carry returns are still attractive after normalization of distressed credits across emerging markets. The low stock of Eurobonds outstanding should also lower El Salvador from the market beta and the higher volatility under Trump policy risks.