El Salvador Bonds Extend Slump on Plans to Overhaul Constitution
(Bloomberg) -- El Salvador’s bonds fell after the government proposed more than 200 changes to the constitution, including an extension of presidential terms.
Dollar notes due in 2035 headed for their lowest in nine months on Thursday, a day after Vice President Felix Ulloa said the government had readied a draft proposal that it will present to the public next week.
For investors, the plans add to uncertainty about policy making, which came into question earlier this year when the ruling party took control of the top court and replaced the attorney general, then made El Salvador the first country to formally adopt Bitcoin as legal tender. It also fuels speculation about whether the nation will be able to finalize a deal with theInternational Monetary Fund.
President Nayib Bukele will review the reforms in September and they will then be presented to the legislative assembly, Ulloa said in a local radio interview.
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“The biggest risk right now is that they enact legislation or policies which would be a red line for the IMF,” said Rick Scott, an emerging-market sovereign analyst at BMO Global Asset Management in London. “The problem with El Salvador is the arc of policy making: It just seems to be more and more driven by the whims of Bukele than anything else.”
Dollar-denominated notes due within the decade are trading at an excess of 1,000 basis points over U.S. Treasuries -- a threshold for securities to be considered in distress. The nation’s debt is the worst performer in emerging markets over the past three months.
Read: Amherst Reiterates Underweight Rating on El Salvador Bonds
The reform proposal would extend the presidential term to six years, from five, and allow the president to be re-elected after one term out of office, versus two terms currently. Lawmakers and mayors would be able to run for immediate re-election and serve a maximum of three, three-year terms.
Election cycles would be matched up instead of holding mid-term legislative elections. Reforms would also extend the term for the attorney general from three to six years, create a new electoral authority and establish a new constitutional court to take the place of the current high court, a move which Ulloa said is designed to improve efficiency.
El Salvador’s current constitution requires the reforms to be approved by the legislative assembly and then ratified by a second legislature, elected in 2024, in order to take effect, Ulloa said. One of the proposed changes is for future constitutional reforms to require approval from a single legislature plus a public referendum, he said.
The reform plans are reminiscent of calls for constitutional overhaul in other Latin American nations -- from Chile’s full-out rewriting to Peru’s new president’s plans for a referendum.
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