Barclays warns the government could use money from savers to pay down debt

To buy back the outstanding bonds, the government will use about $361 million from the country’s international reserves. The English financier is skeptical of the maneuver, asserting that it jeopardizes a huge withdrawal of funds.

Given that El Salvador’s access to the external market is becoming increasingly limited and funding possibilities with multilateral organizations are losing ground, the government seems to have no choice but to Use of funds from international reserves held by the Central Reserve Bank (BCR) for payment of maturities religion In the short term, according to the English agency Barclays in a recent report.

But these decisions are considered risky by the finance company, because “most of these international reserves are deposits of institutions”, such as commercial banks, where Salvadorans’ money is kept.

Their use by the government would leave the financial system with a reduced capacity to respond to potential withdrawals. (…) In this context, the strategy used by the authorities to implement debt buyback is to accelerate the depletion of reserves and reduce the ability to respond to potential capital outflows,” Barclays explains in its July 26 report.

See: The Bukele government will use the money in international reserves to pay off debt

Which is that the government of Najib Bukele will use the money that El Salvador saved as part of the international reserves to buy bonds maturing in 2023 and 2025, after the legislature approved the transfer of 275 million Special Drawing Rights (SDR) granted by the International Monetary Fund (IMF) including Equivalent to approximately $361 million. This is the money that partner countries contribute to the fund and that the agency released this amount to the country in August of last year.

According to Central Reserve Bank (BCR) data, El Salvador had $3,483 million in net international reserves (NIR) as of June this year, with the highest percentage of Salvadorans saving coming in.

And although the amount increased in 2022 compared to 2021, the reserves decreased by 7% of what the state had in its account when Bukele became president.

Barclays believes that El Salvador needs to “keep a larger than usual volume of international reserves to regulate credit lines”.

Read: The government will use the credit that was on its way to support subsidies to pay off outstanding debts

The international reserve is considered a “savings account” for El Salvador and what it has in this account depends on the country’s economic operations with the world, for example exports, investments or remittances. And if this savings account falls from its balance, it is due to payments for imports or debt services, among other things.

That the government take money from international reserves was a maneuver predicted by the English financial services agency EMFI which, in April of this year, considered among the options for the government of El Salvador to get the money was to take the money abroad. reserves.

Now, the same agency is reacting to the debt purchase by emphasizing that it believes the country can get out of trouble after January, but questions “the wisdom of spending limited money on the purchase.”

Why will the government use money from international reserves?

The government is close to paying $800 million in Eurobonds due in January 2023 and another due in December 2025 in the same amount. For this purpose, it announced that it would purchase this debt before maturity with a loan of $200 million granted by the Central American Bank for Economic Integration (CABEI) and of $361 million in international reserves.

You can see: Bukele says he’ll buy El Salvador’s debt ‘up front’ that expires until 2025

But the bonds that the government announced that it will buy from September of this year began to rise after the announcement, which will complicate the country’s financial situation because it will need more than 561 million dollars.

Parameters of the offer are pending and funding sources to complete the deal are not yet clear. At the moment, they may have enough resources to buy a large portion of the 2023 bonds, but buying the 2025 bonds seems more difficult.

In previous governments, El Salvador received loans of $ 1,600 million for both bonds, but after the risks indicated by the main rating agencies: Moody’s, Standard & Poor’s and Fitch Ratings, that the current government will not pay the nearest debt maturity, the price of the bonds began to fall.

As of yesterday, the 2023 bond consulted on Baha.com was priced at $82.38 and before the government announced it was worth $68, up 25% in value.

While bonds maturing in 2025 was traded yesterday at $41.75. The value is still lower than the previous bond, but had it not been for the government’s purchase announcement, this bond would have been around $24.

From a financial point of view, the government may have some sources of financing to overcome in the short term. But the risks to the balance of payments are greater, which could undermine its ability to keep pace with its obligations, as well as the stability of the financial system,” Barclays added.

The government’s idea was to buy it at a lower price than the original price, taking advantage of the drop in value it reversed months ago.

Also: The government has only 560 million dollars to buy 1.6 billion dollars of debt

Given this, EMFI explains in its July 26 report that it is very unusual for buybacks to take place at a lower (price) of the pair, but they expect investors to be willing to accept a discount to offload the important implied element. The probability of default on these bonds.

El Salvador’s internal public debt is $12,654.19 million, and the external debt is $11,925.48 million. This means that the country owes $0.83 out of every $1 that is produced.

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