The Big Idea

Ecuador | Moving forward

| October 29, 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. This material does not constitute research.

Prospects for Ecuador’s sovereign debt continue to look good. President Guillermo Lasso’s administration has made it through a freeze on fuel prices with no significant social unrest so far while negotiations continue with coalition allies. Then there’s the potential bounce on submission of tax reform and further potential gains once approved. The tax reform is a litmus test of the Lasso administration’s ability to reach political consensus on economic reform. Approval of tax reform should put labor reform on a positive trajectory and add momentum to the initial phase of the revised International Monetary Fund program and to the administration’s honeymoon.  It’s a race against time as Lasso’s popularity has peaked ahead of a controversial and difficult agenda. But initial optimism should unwind the current skepticism around Ecuador’s sovereigns that are near the low end of the 6-month trading range.

This is not October 2019 and CONAIE is not hijacking the reform agenda. The demand for gasoline price cuts does not have the same attention as October 2019 since prices have been gradually rising for 14 months without the mistake of the price shock proposal of the Moreno administration. The CONAIE and FUT protests did not amount to much with only an estimated 1,500 in Quito. And it was nothing close to the devastating social unrest of October 2019.  The indigenous groups and unions remain an important influence on politics and policy. However, neither group has the same leverage to destabilize. The local officials have learned what to do and what not to do on managing these protests, such as not fleeing the presidential palace. There has also been extensive debate over the past few years on the controversial topic of fuel subsidies.  The public opinion has shifted against distortive, regressive, and expensive subsidies that promote excessive consumption of fossil fuels and run counter to the environmentally friendly agenda of the indigenous community. There is also no tolerance for the aggressive activism that undermines civil order and damages both private and public property. The small-scale protests of October 27 suggest declining leverage and influence on the Lasso administration and broader public opinion.

The attention now shifts to the Pachakutik and ID and whether there is basis for a working political coalition. The submission of tax reform slips into this week.  This is actually a signal of productive negotiations. The political strategy is to perhaps pre-negotiate support prior to submission. The submission itself will then have a high probability of approval.  The Lasso administration also probably wanted to wait out the protests to monitor what if any influence it would have on the political parties. The freeze on gasoline prices was probably enough of a political concession to Pachakutik that will immunize consumers against any further price spikes, though admittedly at current levels that are close to free market prices.

President Lasso is leveraging his high approval ratings and relying on the autocratic constitutional opportunities that are the residual legacy of the Correa administration. The threat of bypassing legislative authority with a referendum and the risk of snap elections remains serious leverage to force cooperation. The Assembly, with fractured parties and weak leaders, polls at much lower ratings compared to the Lasso administration.  The prospect for snap elections remains the backup plan if the Lasso administration cannot build a coalition for tax and labor reforms.

The reform momentum presents a buying opportunity. There is now more momentum for reform beginning with submission of tax reform. Lasso’s coalition should prevent a majority 51% rejection of tax reform within the fast-track 30 days. The local headlines suggest a potential coalition of 76 votes including BAN, Pachakutik, ID and the independents with the challenge to prevent the 61 deputies of UNES/PSC to reach 70 to reject the reform.

Ecuador bond prices have been within a fairly narrow trading range through the Lasso administration with current levels closer to the low end of the range. This suggests asymmetric optionality to again retest the upside of those price ranges, if not finally break above resistance levels if momentum on tax reform builds further momentum on approval of the labor reform later this year. Investors should prefer the 5% ECUA’30 on the higher current yield and on prospects of bullish curve steepening, especially after the recent underperformance.  The markets remain overly skeptical on the reform agenda and underestimate the political acumen of the Lasso administration.  There is a narrow window to maximize on the reform agenda with the popularity of the Lasso administration already having peaked and with remaining unresolved tensions with CONAIE, the Pandora papers controversy and the public relations management of an unpopular and controversial economic reform agenda.

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 © 2024 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.

The Library

Search Articles