Home Research Barclays As Ecuador Is Poised to Exceed IMF Targets, Barclays Stays ‘Overweight’ Favoring 2030 Bond

As Ecuador Is Poised to Exceed IMF Targets, Barclays Stays ‘Overweight’ Favoring 2030 Bond

As Ecuador Is Poised to Exceed IMF Targets, Barclays Stays ‘Overweight’ Favoring 2030 Bond
Source: Zignox.com

NEW YORK — A stronger than expected economic recovery and a sizable reduction in government spending may lead Ecuador to surpass the fiscal targets agreed with the International Monetary Fund, according to analysts at Barclays PLC.

The Andean country endured last year its largest economic contraction as the COVID-19 pandemic affected key productive sectors and its gross domestic product shrank 7.8%. However, the IMF projects that Ecuador’s GDP is set to recover and expand 2.8% this year and another 3.5% in 2022, giving reasons for encouraging forecast by banks and consultancy firms alike.

“Stronger growth and higher oil prices than expected could lead to a fiscal deficit about 1.0% of GDP smaller than targeted in the IMF program in 2021-22,” analysts Alejandro Arreaza and Sebastian Vargas wrote in a report to investors dated November 23, days before a tax reform bill got cleared on Friday after the nation’s Congress failed to reach a consensus for its approval . “Ecuador has the potential to outperform the fiscal consolidation targets set in its IMF program,” they added.

In the report, “Ecuador: Tailwinds for fiscal consolidation,” Barclays sees the nation’s public sector deficit declining to only 1.5% of GDP this year vs 5.5% in 2020. An ever rosier scenario may be ahead, with a project surplus of 1.2% for 2022, which could be Ecuador’s best performance since 2007, the analysts said. “This improvement, coupled with expected GDP growth of around 4%, should put the public debt level on a declining trajectory, according to our estimates,” they wrote in the research note.

Source: Barclays report “Ecuador: Tailwinds for Fiscal Consolidation.” November 23, 2021.

At the end of September, the IMF approved a second and third reviews of an Extended Fund Facility program for Ecuador, known as EFF, enabling the nation to access about USD800 million in financing. Ecuador’s 27-month EFF arrangement was approved by the multilateral lender on September 30, 2020 for about USD6.5 billion in total financing.

Tax Reform, Bonds

On November 26, the nation’s Congress failed to reach a consensus on a tax reform submitted by the government of President Guillermo Lasso seeking as much as USD1.9 billion in additional revenues in 2022 and 2023, giving its administration the freedom to implement it under fast-track rules starting next year.

Barclays base case scenario contemplated the passing of the reform. In a second research note to investors issued today, the bank reiterated that along with the additional fiscal revenues of approximately 0.7% of Ecuador’s GDP, the reform makes regulatory changes and introduces production-sharing agreements for oil contract and is also key for the next IMF program review. “The reform would help the government to accelerate the fiscal consolidation and at the same time reduce political risks,” the bank said in the report.

For the British bank Ecuador sovereign is fundamentally cheap, and favors the 5% coupon bond maturing in 2030. “As market turns more confident about the fundamental trajectory and the passing of the tax reform, we expect spread compression and a re-steepening of the spread curve, translating in Ecuador ‘30s (spread) outperformance on the curve,” they said.

With the economy progressing Ecuador will seek to return to the international capital markets, Economy and Finance Minister Simon Cueva said on November 5. The country managed to restructure USD17.4 billion in debt last year by exchanging 10 outstanding papers for three new bonds maturing in 2030, 2035 and 2040 and improving interest rates, Reuters reported. After the exchange, Ecuador has not issued new debt to obtain financing despite its liquidity problems, exacerbated by the pandemic. “Ecuador has a vocation to gradually return to the international capital markets,” Cueva told reporters November 5, “but do it in an orderly and predictable way.”

Source: Barclays report “Ecuador: Tailwinds for Fiscal Consolidation.” November 23, 2021.

NOTE: Story updated November 29 at 2:50PM EDT to add a seventh paragraph using a second report by Barclays published today, “Ecuador: Tax Reform Set To Go Through,” commenting on the benefits of the tax reform.

Also Relevant:
* Ecuador’s IMF-Backed Tax Bill Cleared as Congress Fails to Act
* Ecuador Sees a Return to Capital Markets in An Orderly Manner, Economy Minister Says
* Ecuador Gets USD500 Million, 7-Year IDB Loan to Anchor Economic Recovery
* IMF, Ecuador Reach Staff-Level Agreement on Extended Fund Facility
* Ecuador Prison and Armed Forces Chiefs Resign After Riots: BBC


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