Ecuador’s IMF Post-Earthquake Rumblings

Ecuador bonds slumped after an almost 8 scale temblor and aftershock killed hundreds and the government put the rebuilding tab at $ 3 billion or 3 percent of GDP, spurring rumors that it may turn to the IMF for long-term support after other official sources came up short. President Correa had hinted at another external debt issue before the disaster, but investors were demanding near double-digit yields with oil export-related recession predicted this year and the fiscal deficit goal already raised to 3.5 percent of GDP on an assumed $25/barrel price. A $1 billion compensation payment to Occidental Petroleum increased the burden and was offset by initial spending cuts and new taxes, but other contractor arrears are estimated at $2 billion. China extended a $900 million loan and was on track to offer several billion more before the earthquake according to officials. The Inter-American Development Bank and other providers immediately chipped in $650 million to repair damage, and corporate income tax and VAT rates were hiked alongside temporary earnings and wealth levies, the latter applying to assets over $1 million. The President indicated possible sale of state holdings and bond market return for additional funding, but with elections a year away as he prepares to position a successor a full IMF program would seem politically remote although limited emergency facilities could be tapped. He is also touting friendlier joint venture arrangements to secure immediate cash as with a Schlumberger project in 2015, and downplaying the virtual currency alternative to the dollar enshrined in recent law. However the once united sub-regional socialist bloc has splintered with crises and fresh free market leadership in Argentina and Venezuela, and Bolivia’s resounding rejection of another term for President Morales despite opinion approval above 50 percent. His party has been embroiled in scandals, and economic growth may slip to 3 percent this year on hydrocarbons and mining industry decline. The trade surplus disappeared and reserves dropped to $12.5 billion in March as the central bank defended the overvalued currency. A $6 billion public investment campaign will absorb the slack, but the fiscal gap could further widen after it approached 7 percent of GDP in 2015. The IMF’s latest Article IV report recommended exchange rate flexibility to cushion internal and external imbalances, and now that the election referendum is over Finance and Planning Ministry technocrats may consider changes.

Paraguay’s sovereign rating is at the same “BB” with a former business executive as president committed to diversification from agricultural reliance and bureaucratic reduction. Financial services grew over 12 percent last year with such encouragement as the trade surplus hit 1.5 percent of GDP in January-February. Soybean sales continue soft after a 30 percent plunge in 2015, but energy import savings are steady. Infrastructure building is expected to spur capital goods demand and weakness in Brazil, a main commercial partner, will erode exports. Inflation may outstrip output growth this year at 5 percent due to higher food and education costs as industries like hospitality take off to supplement the longstanding beef diet.