May 2 (Bloomberg) -- Ecuador’s bid to reduce poverty by taxing its banks is threatening to deepen the nation’s economic slump, as lenders curb credit and ratchet up interest rates after profits plunged to a three-year low.
Non-government banks, including Citigroup Inc.’s local unit, raised rates on corporate loans by an average 0.21 percentage point in the first quarter to 8.88 percent, the highest since November 2010, according to central bank data. That compares with a decline of 0.72 percentage point to 8.81 percent in Colombia and an increase of 0.01 percentage point to 5.79 percent for similar loans in Peru.
President Rafael Correa fast-tracked the tax bill through Congress during his re-election campaign last year to pay for a 43 percent boost in cash subsidies to low-income families after his opponent, the former chief of the nation’s second-biggest bank, said he wasn’t doing enough to alleviate poverty. The move is backfiring as the drop in bank profits reduces capital available for lending, threatening to weaken economic growth already forecast to be the lowest since 2010, according to Pichincha Casa de Valores SA, Ecuador’s biggest brokerage.
“This is very alarming and could transform into a deceleration of the economy,” Ismael Velez, the firm’s chief executive officer, said in a telephone interview from Quito. “A substantial reduction in profit levels won’t allow banks to keep increasing their credit operations.”
Private banks’ profits tumbled 42 percent in the first quarter, the worst start to the year since 2003, when the country’s lenders were recovering from the collapse of the nation’s financial system.
The Finance Ministry’s and Economic Policy Ministry’s press office declined to comment on the tax law’s effect on the economy.
The law, which took effect Jan. 1, eliminated banks’ tax deductions for reinvesting profits, created a 12 percent tax on some financial services and a levy of as much as 0.35 percent on assets held abroad. The amount banks pay in taxes doubled during the first quarter from the three months ended in December, data from the nation’s banking superintendent show.
The new rules come on top of additional banking measures implemented under Correa, a 50-year-old former economics professor, to force lenders to shed their brokerages, insurance units and other non-core businesses, increase holdings of government-issued debt and eliminate charges for some services, including credit card issuance.
Bank lending is being hobbled as forecasts show Ecuador heading for its weakest annual economic growth in three years. The central bank estimates gross domestic product will rise 4 percent this year after a 5 percent expansion last year and 7.8 percent in 2011. The United Nations’s economic unit cut its forecast for growth to 3.5 percent in December from 4.5 percent in October, before the new taxes were announced.
“Banks aren’t growing at the speed that the economy requires,” said Walter Spurrier, the director of Guayaquil-based economic research company Grupo Spurrier. “If things continue as they have up until now, the trend is toward deceleration.”
Correa’s push for the new taxes came after Guillermo Lasso, the opposition candidate who lost in February elections, had proposed raising the cash subsidy paid to impoverished citizens to $50 a month from $35 as part of his campaign platform.
He said that the increase, which costs an extra $323 million a year, could be paid for by cutting Correa’s publicity budget. Correa responded by sending a bill to Congress, approved in less than a month by a 79-5 margin, proposing the nation’s banks foot the bill or face nationalization.
“Any banker that doesn’t want this, don’t worry, we’ll buy your bank and nationalize it,” Correa said in an Oct. 13 speech.
Calls to Citibank NA’s press offices in Quito and Miami seeking comment weren’t returned. Banco del Pichincha CA and Banco de Guayaquil SA, the nation’s two biggest publicly traded banks, didn’t respond to e-mailed requests for comment.
Yields on the country’s $650 million of bonds due in 2015 fell nine basis points, or 0.09 percentage point, to 7.18 percent at 3:29 p.m. in New York, a record low on a closing basis. The extra yield investors demand to own Ecuador’s notes instead of similar-maturity Treasuries has fallen 1.79 percentage points this year to 6.47 percentage points, according to JPMorgan Chase & Co. indexes.
The taxes are justified given the need to pay for programs that reduce poverty, according to Pedro Solines, Ecuador’s banking superintendent. Retailers and consumer-goods makers also benefit from demand created by the higher subsidies, he said.
“Less profits for the banks, yes, but where does it go? To the people who receive the subsidy,” Solines said in an April 25 interview at the nation’s Congress. “If I receive the subsidy, I’m going to say that the impact is very good. If I run a shop where the person who receives the subsidy spends not $35 but $50, I’m going to say it’s good. If I’m a bank, I’m going to say I’m doing badly.”
Ecuador’s Private Banking Association, an industry group, estimates the new taxes will cut profits by about 36 percent this year from last, according to Cesar Robalino, a former finance minister and president of the organization. While lenders are now trimming costs to cope with the new taxes, the credit restrictions will hurt local businesses and consumers, he said in a telephone interview from Quito.
“If credit keeps falling, this will above all impact economic growth in the private sector,” Robalino said. “This means less financing, not because banks don’t want to lend, but because they can’t lend.”
To contact the reporter on this story: Nathan Gill in Quito at email@example.com