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Ecuador Bonds Hit Record Low Amid Latin America’s Month of Chaos

Stephan Kueffner and Andres Guerra Luz
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Ecuador Bonds Hit Record Low Amid Latin America’s Month of Chaos

(Bloomberg) -- Ecuador’s dollar bonds slumped to a record low Monday after Congress rejected a bill designed to narrow the budget deficit and pave the way for the disbursement of more loans from the International Monetary Fund.

The country’s dollar bonds maturing in 2028 declined for a ninth day -- sinking more than 9 cents on the dollar to 77 cents in New York trading. The extra yield investors demand to hold Ecuador debt over U.S. Treasuries widened 253 basis points to 11.06 percentage points, according to J.P. Morgan indexes.Across South American bonds have been pummelled this month as social unrest swept Bolivia and Chile, violent crime flared in Mexico and elections heralded the return of populism to Argentina. But it is Ecuador that is now leading the pack down as political pressures threaten to send the fiscal deficit rising out of control, with at least six of the country’s dollar sovereign bonds falling 10 cents or more on Monday.

The reforms proposed by President Lenin Moreno, which included an increase in corporate taxes, were rejected by 70 of 133 lawmakers on Sunday with just 32 votes in favor and 31 abstentions. The president, in a nationwide television and radio address, vowed to submit a new fast-track bill on Nov. 19. The stakes are high for the embattled Latin American nation.

“The inconvenient reality is that if Ecuador loses IMF support, then they lose market access,” Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities, wrote in a note.

Ecuador is seeking $6.7 billion in new debt in next year’s draft budget, partly to repay $4.31 billion of debt coming due. Its loan program with the IMF is worth $4.2 billion.

Gasoline Riots

The rejection leaves a funding gap for next year of $1.6 billion, Jaime Reusche, a VP-Senior Credit Officer at Moody’s Investors Service, said in an emailed statement.

“The vote against the measures suggests that the government’s political capital may be more limited than initially thought,” Reusche said. “The baseline scenario that was consistent with Ecuador’s B3 rating included the passing of these measures.”

Moreno, who took office in 2017 and pivoted to the center-right after campaigning from the left, is struggling to narrow the fiscal deficit after violent protests in early October forced him to backtrack on a plan to scrap fuel subsidies.

Legislators allied with Moreno’s predecessor and estranged political mentor, Rafael Correa, and indigenous party Pachakutik voted against the reform package Sunday as a rejection of the IMF accord. Others had challenged the breadth of the measures, which included issues from student debt to mining policy and central bank autonomy, and the short time-frame to discuss its more than 400 articles.

The bill aimed to raise more than $700 million, largely through a gradual increase in the corporate income tax for most companies over the next three years. The new bill will focus on taxes, leaving out other elements like central bank reform, Moreno said.

The government is working closely with the IMF over the proposals, said a person with knowledge of the negotiation who wasn’t allowed to speak on the record.

Moreno’s recent actions have shown that he is willing to stake his presidency on fulfillment of the IMF agreement. Still, that may not be enough.

“I’m skeptical of the ability to get a bill passed on tax increases alone and without any of the other elements that would have made it palatable” for some legislators, said Jose Hidalgo, head of think tank CORDES in Quito. “The essential question now becomes whether Ecuador can obtain the remaining disbursement of $500 million planned for the end of the year.”

(Updates fall of Ecuador 2028 bonds to record low, adds regional context in third graf.)

To contact the reporters on this story: Stephan Kueffner in Quito at skueffner1@bloomberg.net;Andres Guerra Luz in New York at aluz8@bloomberg.net

To contact the editors responsible for this story: Daniel Cancel at dcancel@bloomberg.net, Philip Sanders

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