El Salvador cuts its fiscal deficit despite betting on bitcoin

El Salvador trims its fiscal deficit and holds 2,271 bitcoins

El Salvador's fiscal deficit is narrowing, and JPMorgan confirms it: the country will be able to fund itself at least through 2024. What stands out is not the figure itself, but who signs off on it and with what adjectives. The same state that several rating agencies had placed on the brink of default earlier this year is now described as having outstanding fiscal management. And all of that without giving up its 2,271 bitcoins in the national reserve, with public debt hovering around 90% of GDP.

What JPMorgan says about El Salvador's financing

JPMorgan economist Steven Palacio argues that the country's short-term fiscal outlook "continues to improve" and that El Salvador will be able to "meet its financing needs at least through 2024." In remarks to Reuters, he calls the government's management outstanding, an assessment he extends through June. The note comes with a caveat: the bank itself points out that this pace would not be sustainable after 2024. The relief, in other words, has an expiration date.

The endorsement comes amid an active debt maneuver. Finance Minister Alejandro Zelaya announced the buyback of bonds maturing in 2023 and 2025 before September 15. The state has $565 million for an operation that affects $1.6 billion. The arithmetic alone explains the move: it makes sense to retire paper the market is watching closely.

How much do 2,271 bitcoins weigh for a state?

That is the underlying debate. The conversion circulating in analyses puts the Salvadoran reserve at around $66 million at the current market price. A figure that, counterintuitively, is not much on a sovereign balance sheet: the most frequently cited calculations put it at 0.2% of GDP. Few countries hold 0.2% of their gross domestic product in gold. Almost none.

The nuance matters. For a small state with liquidity strains, that money stops being small change: doubling it — and cryptocurrencies move that fast, in a matter of days — completely changes the picture. The last known purchase was executed in July, with bitcoin below $20,000. Buying the dips has, so far, not gone badly for them.

90% of GDP in debt and the ghost of default

The warnings have not disappeared. Moody's flagged the risk of acquiring more bitcoin, particularly for the state's ability to pay and its fiscal profile. The Public Policy School of London's LSE describes a country with very low economic growth, a wide deficit and nearly 90% of GDP in public debt. The default scenario, forecast since the start of the year by rating agencies and financial institutions, remains on the table in the long term.

Bukele responded to those forecasts, and specifically to The New York Times' coverage of the matter, with two sentences that sum up his position: "Bitcoin is inevitable" and "Will they publish an apology once we pay everything on time?" The question remains unanswered because the payment has not yet come.

Zero taxes for software, AI and hardware

While the debate continues over whether the bet will prove costly, the government is pressing the accelerator elsewhere. Bukele signed the INNOVATION AND TECHNOLOGY MANUFACTURING INCENTIVES ACT, a law that eliminates all taxes — income, property, capital gains and import tariffs — on technological innovations, software programming and applications, artificial intelligence, and the manufacture of computing and communications hardware. It is not a nod to the crypto sector: it is a full tax exemption for the tech industry.

The numbers add up through 2024. What comes after depends on the economy growing enough to grow around that 90% debt load, and there no one is making promises. Some are already marking the date, pointing to 3,000 bitcoins and a different GDP within five years. It is a bet as reasonable as any other in a country that has long been betting against the consensus.