The IMF announced late on 10 December staff level agreement (SLA) on the combined second and third reviews of its Extended Fund Facility (EFF) for Ecuador. That the two reviews are combined is not unexpected; we had anticipated this following the IMF annual meetings in October given delays so far. But what it does do is enable a combined disbursement of cUS$500mn; the second review was scheduled to disburse US$250mn, with the same amount due in the third review (it remains to be seen if subsequent disbursements will be rephased). The IMF Board meeting is scheduled for 19 December.
The IMF agreement follows hot on the heels of the approval by the National Assembly of the government's revised tax reform, which had been reported earlier in the day by media; although the Fund's announcement of the SLA was still much sooner than we had expected. In a short statement, the IMF commended the authorities’ strong commitment to implement policies aimed at strengthening the Ecuadorian economy and laying the groundwork for robust and sustainable growth, while protecting the most vulnerable. It welcomed the approval of the tax reform by the National Assembly, which it says will make the tax system more efficient, simple, and growth-friendly and improve Ecuador’s fiscal position. The tax reform, which had been submitted by the government in late November, provides for tax increases worth US$600mn according to media reports (about half the amount that the government had hoped to save from the removal of fuel subsidies it had announced on 1 October but which it had to reverse subsequently).
Recall that the IMF agreement comes after a difficult few months for President Moreno and his government, as fears of a bond default resurfaced. This followed the negative market reaction to the rejection of reform measures the government was trying to implement to comply with its US$4.2bn IMF EFF programme; first after country-wide protests in response to fuel subsidy removal in October which the President was forced to reverse, and then to the Assembly’s rejection of President Moreno’s initial tax reform measures on 17 November. Remember the IMF had even announced SLA on the second review on 23 September before things took a turn for the worst. The bonds slumped some 30% in the process.
However, the situation turned more positive in recent weeks, signalled by an IMF statement on 27 November, which reaffirmed the government’s commitment to the IMF programme, and the IMF’s engagement with the authorities, and suggesting that the government's revised tax reform had a better chance of gaining Congressional approval.
We see the announcement as unambiguously positive for Ecuador bonds in the near-term, although implementation risks, particularly amid President Moreno's falling ratings and weak economic growth, remain.
Crucially, disbursement of the next tranche of IMF funds, together with other IFI money sitting behind the IMF programme, as part of the overall financing package, should go along way to alleviating financing concerns over the immediate future, which will support the bonds.
We reiterate our Buy recommendation on Ecuador bonds, specifically, 7.875% 2028, with a yield of 11.1% (z-spread 945bp), on a mid-price basis as of cob 10 December on Bloomberg (at an indicative mid price of 82.9).