Uncategorized
Ecuador | Making the best of good relations
admin | May 29, 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. This material does not constitute research.
Ecuador clearly has some friends with a steady stream of commitments and disbursements of multilateral loans over the past few weeks from the World Bank, the International Monetary Fund, the Inter-American Development Bank and others. The IMF has an important role as a lender of last resort, and Ecuador desperately needs loans to cover a fiscal deficit of around 9% of GDP. Ecuador has also delivered beyond expectations with economic reform and effective fiscal management as well as complying with requests for forensic accounting of fiscal revenues and expenses. But Ecuador needs to tap multilateral credit through a formal IMF program.
What more is necessary to re-establish a successor IMF program? It would provide an important boost of confidence ahead of bondholder negotiations as well as critical funds to reduce or close the funding gap this year. The cash flow stress remains an important risk in the second half of 2020 with forced austerity, the risk for a deeper economic recession and populist backlash ahead of the February 2021 presidential elections. There are no obvious signposts of next steps for a formal IMF program except perhaps the typical coordination ahead of the debt restructuring. There could be some insights ahead of the conference call scheduled for June 1 to discuss the May 29 publication of the staff report on the IMF’s Rapid Financing Instrument. The shortfall on the budget remains an important risk that should contribute to a high exit yield after restructuring, depending on the development of IMF relations.
Ecuador’s latest investor presentation referenced a mid-June timeframe for a successor IMF program. There was a suspension of the IMF’s Extended Fund Facility last year after the disappointment of the quarterly targets and unintentional discrepancies of the non-financial public sector data. There has since been much progress. The IMF announced that these data irregularities have been remedied with the release of revised historic data that also coincide with an orthodox policy shift. Ecuador has delivered on an important structural benchmark with the approval of public finance reform as well as the historic liberalization of energy subsidies. The rigidity of dollarization has also forced the inconvenience of fiscal austerity with the recent announcement of $2.7 billion in cutbacks this year, particularly focused on public sector wages and goods and services. These cutbacks may be temporary or permanent depending on how budgetary finances evolve. For bondholders, it has potentially conflicting consequences. It’s important that the adjustment burden is shared between domestic and external liabilities as necessary to encourage debt relief from bondholders.
However, it’s also unclear whether these cutbacks are politically and socially feasible through 2021. This is a particular concern ahead of the election cycle next year. The election cycle is inopportune as is the populist social and political pressures heighten during the current steep recession, and they may continue into next year. The bondholders are forced to reassess the debt repayment alternatives with a revised restructuring framework a better alternative than hard default. The IMF would predictably have concerns about commitment to a new funding program through an election cycle, especially with the recent political transition in Argentina a reminder about the risks of policy shift post elections. However, election cycles alone are not the only determinant. The Moreno administration has built up significant goodwill over the past few weeks, and US-Ecuador relations also figure heavily. It’s also critical to reduce the political risks, with multilateral loans a substitute for overly restrictive fiscal austerity. Too much fiscal austerity could backfire. It’s important that Ecuador source multilateral credit through a formal IMF program.
The IMF has said little about the context for a revised program. There was no immediate release of the staff assessment after disbursement of the RFI, unlike El Salvador or Costa Rica. The latest announcement is the official release of the staff on May 29 with an opportunity to define the potential relations. It seems unusual not to clarify IMF relations considering all the recent efforts from Ecuador including not only economic reform and fiscal adjustment but also the imminent launch of debt restructuring. This in itself will require close coordination with the IMF, especially as bondholders expect some type of validation on sustainability on the debt restructuring proposal. Perhaps it’s just a vocal endorsement. The formal request from Argentina to the IMF for a technical document on debt sustainability analysis could be interpreted as a political strategy to indemnify their unwillingness to repay bondholders. We don’t assume the same approach for Ecuador; however IMF endorsement on debt sustainability is a critical pre-requisite for a successor program.
The underfunded program and scarce financing alternatives will likely motivate Ecuador to seek a new formal IMF program. Perhaps the alternatives downshift to a compromise solution of a 12-month Stand-by Accord as opposed to the previous 3-year EFF. This would serve several objectives: endorsement of the debt restructuring proposal, technical guidance on current policy challenges and commitment of funds to reduce the financing shortfall through this year. It could also provide the optionality for the next administration to continue with an IMF program for the political and practical convenience of an active program. This could also assist on reducing the policy risk premium and the subsequent exit yield post restructuring, perhaps closer to 10% from 12%. The Eurobond debt only comprises 20% of GDP and in itself is not the problem or the solution. The exit yield post restructuring depends not only on lower Eurobond debt repayment burden but also commitment to medium term fiscal discipline and sufficient funds to ensure stable governability through the election cycle. Therefore, the IMF relations are critical.
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.
Important Disclaimers
Copyright © 2025 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.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
