The Big Idea
Ecuador | Governability
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.
There has almost been a wait-and-see on bond prices after the initial optimism of the Lasso win. Yields dipped briefly below 9% but then backed up and continued responding more to externals. There is potential for sub-9% yields again if investors start to rotate out of overweight positions in El Salvador to pick up 200 bp in yield. To break below, say, 8.5%, investors would need to see stronger governability and the political support needed for economic reform. The low coupons require a more activist investment strategy. There is positive momentum near-term and potential for full convergence with emerging markets ‘B’ credits if political cooperation points toward a credible medium-term economic framework.
It is a more nuanced investment strategy for Ecuador with only the 0.5% ECUA’30 soon offering relatively attractive 6% current yield after the step-up on coupons in July. The rest of the curve would continue to offer low current yields of 0.8% to 1.5%. Ecuador is no longer the high beta carry trade when 9% average coupons offered a buffer against a track record of high volatility. This demands a more activist approach with directional gains the main contributor to total returns.
Prospects for Ecuador look constructive short-term. There is positive momentum typical in the early phase of a transition, with headlines of a technocrat economic team and prospects for a revised formal International Monetary Fund program. This should provide some interim cushion from fiscal and external stress and a framework for medium-term debt sustainability. However, unlike other emerging markets credits with IMF programs, it is not the same anchor for near-term carry returns on deferred coupon payments. Rather, the more important role for the IMF is whether it serves as an effective framework for medium-term debt repayment.
There is still potential for near-term positive credit momentum. Market-friendly reform initiatives from a high-quality technocrat team that has already met with multilaterals to renew formal IMF relations is positive. The IMF program should relieve budget stress. But USD inflows are also necessary to strengthen weak dollarization with a vote of confidence on commitment to fiscal discipline and investment-led growth.
There are few if any comps with most emerging markets credits with IMF programs trading between 5.5% and 7.0% for benchmark 10-year bonds. Ecuador remains an outlier as a liquid, benchmark credit with low coupons and uncertain medium-term framework. The curve should again test below 9% yields with bullish curve steepening similar to, say, the initial phase of curve normalization in El Salvador in December 2020 and January 2021 at 8.5% yields. The favorable technicals may also contribute to this positive momentum as investors reduce their El Salvador overweight and add to what had been just a neutral position ahead of the elections. The rotation out of the ELSALV’29 and into the 0.5% ECUA’30 provides roughly 200 bp Z-spread and takes out 20 points.
The context for further spread tightening to converge with ‘B’ emerging markets credits yielding between 5.5% and 7.0% would require effective governability that reassures commitment to medium-term reform. It is not just the qualifications of a technocrat economic team but rather the capability of the political team to collaborate with the Assembly on what remains a difficult and controversial reform agenda. It is difficult to be optimistic after the headline setbacks in Colombia on tax reform and the dominant populist influence within Ecuador. President-elect Lasso will have to show himself adept on not only raising awareness about what is necessary to defend dollarization but also negotiate a workable coalition in congress. The headlines and investor interest over the past few days have all focused on what if any potential coalition could emerge from within a fractured legislature ahead of today’s formal transition.
There is no natural coalition across disparate ideologies with the controversial UNES representing the largest single minority at 36% and an unusual power broker on current negotiations to form a voting block with either the 32% ID/Pachakutik coalition or the 21% CREO/PSC coalition. Recent days have marked the turnover of the Assembly with a lot of politicing on who heads leadership and how to form the 51% voting block required for the Assembly President and two Vice-President posts. The negotiations have suddenly shifted with UNES now an important swing vote towards a coalition with PSC/CREO instead of ID/Pachakutik. Pachakutik is now at risk of losing the leadership as it may potentially shift to PSC. The Assembly leadership is an important partner to the executive, so it would be much more convenient if PSC/CREO assumes that role. UNES may not be a reliable partner on what will probably remain an unstable and fluid coalition dependent upon the specific agenda. However, the potential for a UNES coalition is probably more opportunistic than dogmatic as they try to reinvent themselves and remain relevant after latest defeat. The recent negotiations would not only strengthen executive/legislative relations but also provide optimism of a potential workable coalition. The Lasso administration will still have to carefully prioritize the economic agenda with pre-negotiations and socialization process to reach consensus on controversial reforms. Costa Rica perhaps offers the best reference on managing the conflicting objectives of an austerity reform agenda that’s socially and politically viable. If the Lasso-elect administration can successfully maneuver through difficult politics, then this would provide the catalyst for convergence with ‘B’ emerging markets peers.
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.
