Ecuador to Reform Financial Markets, Boost Trading

By Stephan Kueffner

July 23 (Bloomberg) -- Ecuador plans to reform its financial markets by April, aiming to boost trading of stocks, bonds and other securities to 50 percent of gross domestic product by 2014 from the current 10 percent, said Luis Rosero, a central bank director.

A new bank that will manage the state-owned Ecuadorean Social Security Institute’s assets will play a key role in providing funds and liquidity to the market, Rosero said in an interview in Quito.

“The important thing is for the market to increase investment and achieve sustained growth,” Rosero said. “That’s the fundamental goal.”

The central bank is helping to draft legislation to modernize the markets, demutualizing the stock markets in Guayaquil and Quito and strengthening regulations to increase transparency. President Rafael Correa’s plans to double taxes on capital outflows to 2 percent and to tax dividends will make it hard for the reforms to lure capital, said Sebastian Caviedes, an economist at Humboldt Management in Quito.

“A new tax on income from dividends puts a new entrance barrier, which is negative for a market as little developed as Ecuador,” Caviedes said.

Rosero said the central bank is aware that the tax increase plan may conflict with the push to deepen financial markets. The bank is working with Ecuador’s tax service to try to prevent taxes from undermining the plan, he said. Correa defaulted on $3.2 billion of bonds in December and March, saying the securities had been issued illegally.

Ecuador’s Social Security Institute had $5.06 billion in investments as of April 30. The bank planned to manage the institute’s money -- to be known as the “Affiliate’s Bank” -- will channel the funds into long-term investments that banks haven’t made because of a focus on short-term, money market investments, Rosero said.