Uncategorized
Ecuador | Cash flow stress
admin | November 13, 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.
Debt relief alone is no solution for countries struggling with external shock and high structural fiscal deficits. Cash flow remains a problem for all emerging markets ‘B’ credits, and Ecuador is no exception. Tax collection through October disappointed and reversed the optimism of the previous months while the Google mobility index shows recent stagnation. And then there are the approaching February 2021 general elections.
The $2 billion in International Monetary Fund loans were quickly disbursed in late September and quickly reallocated for pent-up spending. The weak tax collection increases Ecuador’s dependence on multilateral and bilateral loans. Minister of Economy and Finance Pozo suggests delays on the $1.7 billion China loans and mentions the prospects of a “reactivation bond,” which is perhaps a social bond. It is also critical that President Moreno delivers on the IMF pre-requisites, including approval of anti-corruption legislation before year-end with a first vote potentially next week. This will set the tone for legislative cooperation and broader political support for the IMF program. The high beta and low cash prices on Ecuador’s debt have allowed for month-to-date outperformance, but these gains are only sustainable so long as the economic team delivers on the IMF reform agenda and secures necessary funding to lower election-risk premium.
It is all about cash flow management. The weaker tax collection for October reinforces the importance of sourcing sufficient external credit. There was a disappointing 33% year-over-yaer contraction in October taxes and a reversal from the previous months’ improving momentum. There has also been no apparent progress on the commitment from China on $1.7 billion in loans, while Minister Pozo mentions the prospect of “reactivation bond” through IDB Invest. There have not been any follow-up details, though restricted access to capital markets suggests perhaps launching another social bond and targeting captive ESG demand. This may unnerve Eurobond holders on the subordination to what has become a senior status security on the social bond’s exemption of the debt restructuring. However, the substitution for the China loans suggests equal priority status. The intercreditor equity is also a secondary concern. More important near-term is sourcing sufficient funds to ward off a populist backlash ahead of February 2021 general elections. The economic recovery is critical for not only a smooth policy transition but also for lower social and political backlash to the ambitious IMF fiscal adjustment program.
The latest treasury data show a total of $2.1 billion in external credit so far in the fourth quarter of 2020, mostly$2 billion in IMF loans. That contrasts with official estimates of $7.3 billion in the fourth quarter that includes $1.55 billion from IADB/WB/CAF, $1.7 billion from China and $4 billion from the IMF, including September and December equal disbursements. There was also some marginal relief on payment in kind of $500 million with local notes for domestic liabilities. There have been few details on the $1.55 billion expected from the IADB/WB/CAF in the fourth quarter while officials suggest delays on the $1.7 billion China loan until next year. Minister Pozo did mention a scheduled board vote for the $500 million loan from the World Bank on November 24 and disbursement 10 days afterwards. This reinforces the importance of the $500 million World Bank disbursement, the prospects for another social bond and the second $2 billion IMF tranche for December.
The eligibility of the IMF loan disbursements requires enactment of the anti-corruption legislation before end December and enactment of the central bank’s legal framework (COMYF) before end January. These are the two initiatives that require legislative cooperation and that have been formulated and discussed since last year. Minister Pozo mentions that the anti-corruption legislation was already submitted earlier this year with the challenge now refocusing the deputies away from the election cycle and back to reform. The Justice committee has begun review with first of the two debates possibly next week for final approval in December.
It’s a tight timeframe, but there are no other alternatives than negotiating sufficient support for these structural benchmarks. The legislative approval would show broader societal support and a litmus test for more controversial reforms next year. If we assume policy continuity through the election cycle with a team of competent technocrats, the increasing challenge will focus on political finesse for a country that already benefits from an economic framework and trial-and-error on previous measures. This political transition depends upon stable IMF relations and a sufficient influx of funds in the fourth quarter that would reduce budget stress and backlash for a populist candidate.
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.
