Ecuador | High beta status
admin | February 21, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Ecuador has turned in one of the worst performances in EM this year, only outperforming Lebanon. Some analysts chalk this up to concerns about economic reform and the Moody’s downgrade, but crowded long positions and illiquid secondary trading unable to take heavy selling looks like the better explanation. Ecuador has become a benchmark name but with low ‘B’ credit ratings. This exaggerates Ecuador’s beta with obvious correlation to Ecuador Eurobonds and other EM risk assets like CLP, COP and MSCI. Ecuador’s bond prices have not recovered on the recent bounce in oil prices, which had been the only definitive fundamental rational for recent weakness. If external risk stabilizes, then potentially positive developments on asset monetization and economic reform could lift the name over the next few weeks.
Ecuador Eurobonds and other risky assets have traded with high correlation over the past few months after Ecuador recovered from a political setback on the omnibus bill in October 2019. Risk-on sentiment made Ecuador one of the best performers earlier this year, but that unraveled as the coronavirus triggered risk-off over the past weeks. There hasn’t been a positive endogenous shock to immunize against this external contagion. Instead the market has focused on rollover risk based on restricted market access and disruption to the secondary curve after the issuance of the $400 million social bond.
It’s clear that there is no room for any additional Eurobond issuance. A small structured deal had a disproportionate impact on the secondary curve, and the market seems constantly concerned about surprise new issuance and increasing supply risk. The latest Economy Ministry investor call provided reassurance that 2020 funding could rely on multilateral funds and domestic capital markets with no need for capital markets funding. The economic team needs to continue the fiscal adjustment financed via the official creditor community while also building capacity in their local capital markets.
The IMF was on a mission to conduct the fourth review last week, using flexible criteria that should lead to the next disbursement next month. There is also potential for positive surprise from a partial elimination of fuel subsidies, and the next few months also open a window of opportunity for economic reform ahead of a more intense election cycle in late 2020. There have been consistent consultations to socialize and build broader acceptance for the reduction in fuel subsidies, perhaps first tackling the less controversial gasoline subsidies. The legislature is also slated to consider fast track economic reform with COPLAFYP in mid-March as well as the COMYF bill in April. This should provide an opportunity to test coalition support after the recent noise about the departure of CREO. These reforms are not controversial, and the Moreno administration has been careful to pre-negotiate support similar to the successful approval of the tax reform.
The latest investor call last week didn’t reassure investors. Ecuador has still lagged the latest bounce in oil prices. It’s notable that the EM risky assets have lagged the past few days despite consolidation in broader external risk. Recent heightened EM volatility perhaps is a deterrent. Positive as opposed to negative headlines should have more impact on prices after the cumulative weakness of the past three weeks and ahead of potentially positive event news on economic reform. Ecuador’s fundamentals still look broadly stable with current levels oversold and more sensitive to potentially positive domestic events as long as external risk remains supportive.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.