Ecuador's Budget Gap May Spin `Out of Control' With New Bill, Albion Says

Proposed changes to Ecuador’s public finance law may swell government debt and allow fiscal accounts to get “out of control,” the president of brokerage Albion Casa de Valores SA said.

Plans to exempt short-term treasury notes from being classified as public debt and a lack of restrictions on the amount the government can issue each year may let the South American country take on more debt than it should, Paul Palacios, head of the nation’s third-largest brokerage, said yesterday in a telephone interview.

Ecuador’s congress is considering a proposal by President Rafael Correa to change the Andean nation’s budget laws to increase state control over local governments and expand executive powers to alter spending, according to a copy of the bill on congress’s website. The law would also “redefine the concept of public debt” to increase government “flexibility,” according to the bill.

“Any process that lets a person, company, or state issue more debt than it should, without rigorous controls, could put the system in danger,” said Palacios, who is also an economic analyst at Guayaquil-based Albion. The government “should be careful with the amount of the treasuries issued” because the size of public debt “could get out of control,” he said.

Finance Minister Patricio Rivera declined to comment, an assistant who isn’t authorized to speak publicly, said yesterday by telephone. National Planning and Development Secretary Rene Ramirez didn’t respond to a request for an interview.

‘Liquidity’

Rivera said Sept. 24 that the treasury notes would be used if the government needed “liquidity.” The Finance Ministry hasn’t said what the treasuries will yield, or the amount it may issue.

Ecuador, South America’s seventh-biggest economy, has had limited access to financing since defaulting on $3.2 billion in international bonds since 2008. The country planned the sale of as much as $1.5 billion of domestic bonds this year to finance infrastructure projects and cover the budget deficit, according to the Finance Ministry.

Buy the Debt

The nation’s Social Security Institute will probably buy most of the debt issued by the government this year, institute President Ramiro Gonzalez said in a June 30 interview.

The government planned to sell $465 million of 12-year bonds at 7 percent, and $91.3 million in one- and three-year bonds at an interest rate between 4 percent and 4.5 percent, the Finance Ministry said in May.

The yield on Ecuador’s 9.375 percent bonds maturing in 2015 was unchanged at 11.6 percent at 2:24 p.m. New York time, according to JPMorgan Chase & Co. The yield has risen 59 basis points, or 0.59 percentage point, this year, while the bond’s price has declined 1.5 cents to 91 cents on the dollar, according to JPMorgan.

The extra yield investors demand to hold Ecuadorean dollar bonds instead of U.S. Treasuries narrowed 28 basis points, or 0.28 percentage point, to 9.97 percentage points today, according to JPMorgan’s EMBI+ index. Ecuadorean government debt is the second-riskiest after Venezuela’s among 15 emerging markets tracked by the bank.

‘Attempted Coup’

Correa, who was the target of what he calls an “attempted coup” on Sept. 30 by police protesting changes to a public service law, is seeking to reassert state control over local governments after two decades of decentralization and create “new financial instruments different to public debt,” to increase funding sources, according to the proposed bill.

The new law would allow the president to modify the budget by 15 percent and let banks guarantee part of their deposits with state bonds, according to congress’s website.

Proposed changes to banks’ reserve requirements, allowing financial institutions to use up to 75 percent of their reserves held at the central bank to invest in treasury notes, may decrease confidence in the Andean nation’s financial system if banks choose to invest the maximum amount allowed under the new law, Ricardo Cuesta, chairman of the nation’s Private Bank Association, said today.

“By definition, deposit reserves should be totally liquid,” Cuesta, who is also the executive president of Quito- based Banco Promerica SA, said today in an e-mailed response to questions. “Liquidity is liquidity, not investments.”

Ecuador’s central bank President Diego Borja has also criticized the plan to allow banks to use government bonds to guarantee deposits, saying Sept. 29 that reserves need to be liquid. Ecuador approved a new constitution in 2008 that stripped the central bank of autonomy.

Congress has until Oct. 16 to approve or reject the bill or it will become law by decree, according to the Finance Ministry.

To contact the reporter on this story: Nathan Gill in Quito at ngill4@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at Papadopoulos@bloomberg.net

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