Opus 20: Bhutan Part 2 - Macro, Hydro, & Bitcoin

An indebted nation mining Bitcoin powered by their own mountains

Taking Stock of Bhutan

During the research for Part 1 of this series, I read many of the public filings and annual reports of the listed Bhutanese companies. Much like 10Q/Ks here in the States, these filings contain management discussions on the macroeconomic outlook for their home market. Combine these with the RMA’s annual reports, and you get a complete picture of the Bhutanese economy. There will be future posts on other Bhutanese listed securities, but I thought a 10,000 ft view of the Bhutanese economy and market would be helpful framing for these future deep dives. 

I was surprised by how much first-party data there was from the Bhutanese government. I can’t think of many other <$5B GDP economies with this level of economic transparency, data, and analytical sophistication when it comes to their analysis and commentary. How many other micro-economies of this size publish their Phillips Curve framework for inflation management in their central bank reports? 

Bhutan’s Macro Economic Situation

Let’s start with employment. Youth unemployment is high in Bhutan at 20.7%, which would put it between Nepal, Brazil, and Columbia. The youth unemployment rate has more than doubled over the last decade, mainly in the post-COVID era, due to many students not entering the labor force coming out of school. I imagine many people are working on their family’s farm or in grey, untracked markets that are not counted in this figure. Conversely, though, Bhutan's labor force participation rate (~70%) ranks among the top 25 countries in the world, sitting between Finland and Singapore, two far more mature economies. It is difficult for me to reconcile these two conflating data points and provide an answer as to why they are sitting at such polar opposites of the employment spectrum. Another interesting employment fact: 86% of employed persons in Bhutan work more than 50 hours per week, which is near a global high. 

Bhutan’s current account, or trade, deficit as a % of GDP is also far higher than I expected at 32.9%, up from 12% in 2021. This places it in the top decile of the highest trade imbalance deficits in the world relative to GDP. It intuitively makes sense given the company’s small size and geography; agriculture is no easy feat in the Himalayan highlands, and the country is still early in its domestic industrialization. Nearly half of Bhutan’s export value is hydroelectricity due to the abundant mountain rivers and alpine lakes the country has access to - more on this below. 

RMA’s Main Office

Unfortunately, the fiscal deficit doesn’t look much better. At -7.8%, Bhutan’s deficit as a percent of GDP is amongst the worst in the world and much worse than its regional and socioeconomic peers. Bhutan’s public debt to GDP is 133%, which ranks in the top 10 globally. This is potentially a dangerous place for Bhutan, which does not have its own currency, a central bank that must follow India’s, and diminishing central bank reserves. 

Bhutan is at the mercy of the Rupee, and India’s monetary policy will continue to differ from Bhutan’s. India’s current account deficit is only -1% today and has a much lower debt-to-GDP ratio. India’s government also holds 65% of all Bhutanese public debt as of June 2023. Thankfully for Bhutan, a majority (66%) of the debt is rupee-denominated, protecting them from the USD/INR exchange rate continuing to fall. The balance of Bhutanese debt is made up mostly of SDR (21%), USD (10%), and Yen (6%), so there is still an effect of the debt getting more expensive every day with the continued strengthening of these other currencies. The country’s balance sheet is also getting strained on the other side. The RMA experienced a 40% decline in total reserves. Bhutan does have a significant $175M of debt coming due in the next six months, according to the chart below from the Ministry of Finance’s mid-year report:

So far, all accounts point to the RBI wanting to continue weakening the Rupee to drive exports, which will continue to hurt the Bhutanese purchasing power given the import imbalance. On page 60 of the RMA’s annual report, they comment:

“The empirical findings also shows that the current fixed exchange rate regime with India remains optimal and appropriate at this point of time. However, the pegged arrangement has limited the autonomy of monetary policy operations and carrying out effective foreign exchange market intervention. Therefore, it is crucial to closely monitor the development of exchange rate market, considering that it has considerable influence on financial and economic performance in the country. [...] As the global foreign exchange market remains uncertain and further depreciation of Ngultrum to USD is imminent as per the latest development in foreign exchange market.”

They also add:

“Concessional borrowings from international agencies are being explored by the government to counter foreign exchange reserves depletion. While the measures implemented so far are a short-term and temporary solution, a long-term strategy to diversify the economy and bringing in investment remains paramount.”

On the other hand, several factors alleviate some immediate risks for Bhutan’s monetary and fiscal position. First, most of Bhutan’s public debt (69%) is in the form of loans for the country’s hydroelectric dams. These dams have guaranteed purchase agreements from the Indian Government. Bhutan’s Ministry of Finance also structured this debt to have delayed servicing agreements one year after the dams came online to allow for liquidity cushions. Second, 95% of the debt is fixed-rate with an average time to maturity of over ten years. Unfortunately, I was unable to find any price data on this debt.

For the Bhutanese consumer, everyday life has continued to get more and more expensive. Headline inflation currently sits at 4.75%. The government did a good job bringing down core inflation from the 2021/2022 highs of 8+%. Bhutan imports much of its food (beyond the everyday staples of rice, proteins, etc.) and global commodity prices drove up import costs by 17% in 2022 combined with a Bhutanese Ngultrum (their currency) depreciation of 8.2% in the same period. 

Construction growth is strong across the country at 17% YoY. Empirically, this lines up, given the sheer amount of construction we saw during our time in the country. From the main cities to the remote villages, there were active construction sites for hotels, stores, multi-family housing, and factories everywhere. Almost every other vehicle on the road was a construction truck delivering building materials around the country. Many of which were beautifully decorated: 

Look at the eyelashes! 

Hydropower

While we did not see any hydroelectric dams during our visit to Bhutan, they are the country’s most important assets. Over 40% of the government’s revenue comes from taxes and dues related to hydroelectric power projects, and a large portion of the population is employed by hydroelectric power companies directly or indirectly via construction companies. Bhutan’s hydro dams met many delays and setbacks throughout their construction over the last few years due to geological disruptions and environmental pushback, given that many rivers are home to endangered native fish species and other wildlife. 

One of Bhutan’s hydro plants under construction

Bhutan is estimated to have access to 30,000 MW of hydroelectric power within its borders, with only 10% capitalized on so far. This is a massive amount of energy. It equates to 262 TWh a year in energy production potential. New York state as a whole consumes only 140 TWh a year in energy. 

Bhutan’s main hydro dams currently produce power for between $0.03 and $0.05 per kWh. Bhutan ranks among some of the oil and natural gas behemoths - Libya, Saudi, Nigeria, and Qatar - when it comes to the cost of energy. However, it is unclear what the subsidization of these costs or how much the initial investment was for the hydro dams. Bhutan’s hydropower relevancy may diminish as India continues to build their domestic infrastructure projects focusing on solar and wind. 

Bhutan & Bitcoin

What happens when you have an isolated country with some of the cheapest power in the world? That’s right: bitcoin. That is exactly what Bhutan decided to do. We first heard about this on our trip during our initial drive from the country’s main airport in Paro. There were towering power lines crawling up a mountainside, and I asked our guide where they were going. With a smirk, he shared that there was a large mining warehouse up on top of the mountain connected to a hydroelectric power station. It took many assertions for me to believe him. 

The Bhutanese government is one of the few that actively mines Bitcoin as a government-supported financial initiative. It is rumored that the government has been actively mining since 2017 but recently came out and announced a partnership to build a huge mining data center. Over 10% of the country's imports in 2022 were mining chips - all of which were purchased by the sovereign investment fund, DHI, for the sole purpose of mining Bitcoin. That same investment fund was also caught up in a handful of the crypto bankruptcies. This means Bhutan is the only government in the world actively mining and investing in crypto for financial gain. It is a wild juxtaposition: a conservative, Buddhist country tucked away in the Himalayas speculating in crypto. 

Sadly, there is not much other data or background available on the government’s crypto plans. While there, we did not hear anything about it beyond the first day when we saw the power lines. The company the Bhutan government is partnering with, Bitdeer, has lost 70% of its value since it listed on the NASDAQ in April 2023. In its Q2 filing, the company shared:

“Construction of the Company’s Gedu mining datacenter in Bhutan (the “Gedu Datacenter”) has been completed, and the Company is currently conducting power-on testing [...] The Company also has another 100MW of capacity under construction in Bhutan”

For those interested, Gedu is a tiny village in southern Bhutan with a population of 4,288. And it is now home to one of the largest mining farms in the world. Wild.