The Big Idea

Ecuador | Pandemic politics

| August 6, 2021

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’s impressive vaccination surge over the past few weeks has led to quick convergence with other countries in the region. The current pace suggests the country should reach the new Lasso administration’s campaign promise of 50% vaccination rate by the end of August. This was an important priority and a necessary boost to political capital to keep the political honeymoon going.  This now sets the stage for assessing the execution risks of the country’s International Monetary Fund program. By the end of September, the market should get a closer look at the program’s reform calendar and the political strategy for legislative cooperation.  Ecuador will enter a defining moment later this year for solidifying political support for economic reform.  For Eurobond holders, the level of commitment to debt sustainability should determine whether yields break to new lower levels.

The IMF event risk remains the binary determinant for most if not all the high yielder sovereigns.  However, it is not so much about the deal risk for an IMF agreement but rather the execution risk.  The restructured Eurobonds backload the payments, and future repayments consequently dependent on a successful economic reform agenda.  There are no near-term liquidity risks for the postponed debt payments, but rather it’s the solvency risks that most influence Eurobond performance. The success or failure of the economic reform agenda will determine whether Eurobond yields can break out of the 8.5% to 9.5% range.

The official rhetoric suggests a final staff level agreement this month and a release of the staff report after the IMF board review in September. This will provide the guidelines and calendar to assess the execution risks.  The challenge for the Lasso administration is to pursue both a political and economic agenda.  There are high expectations for a comprehensive and credible economic agenda under the technocrat influence of a well-respected economic team and the IMF staff.  The hard part is designing an economic program that is both socially and politically viable amid the reality of a post-pandemic shock that requires gradual and backloaded fiscal austerity. Costa Rica should serve as a template with a clear departure from the proposed 3% VAT hike after the social backlash in Colombia.  The execution risks will depend on a politically feasible program and the political strategy to reach a workable legislative coalition.

There is an overhang of skepticism for a culturally populist country possibly unaware of what’s necessary to defend popular dollarization after the violent 2019 social backlash following elimination of energy subsidies. The Lasso administration should be well aware of the social and political constraints after the trial and error of the Moreno administration and Lasso’s narrow victory against the populist Correista candidate.  However, the market should also recognize the progress of the Moreno administration to successfully liberalize gasoline prices, structurally reduce the fiscal deficit and push through central bank, budgetary and monetary reform.  There was successful legislative cooperation for the IMF program through a politically tense election cycle and weak Moreno administration. However, it is now a more difficult phase of adjustment. There is a weaker legislative coalition and continuing pushback from CONAEI on subsidies.  The economic reform agenda should include more controversial tax and labor reforms while the legislature is much more fractured with the ruling BAN party representation of only 18%.

It is not clear what the political strategy will reach a workable majority with the Pachakutik and Democratic Left parties. These are not obvious allies for their center-left ideologies. President Lasso will have to leverage his high 70% popularity, launch a public awareness campaign, and emphasize progressive and socially inclusive reforms. The successful vaccination campaign should also provide some initial momentum. The Costa Rica IMF program again suggests a potential template for a political strategy that lowers execution risks. It is difficult not have to have some optimism in the next phase of an IMF program with initial political capital for the economic reform agenda.  This makes us constructive on the credit on soon entering into a critical phase to assess execution risks.

Siobhan Morden
siobhan.morden@santander.us
1 (212) 692-2539

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 © 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.

The Library

Search Articles