The Big Idea

Ecuador | Referendum expectations

| April 8, 2022

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.

Referendums in Ecuador have become a rather typical political strategy to bypass an uncooperative legislature. The lengthy preparation for Ecuador’s upcoming referendum has offered important time to socialize and discuss economic and political reform. The legislature was unwilling to seriously discuss the things needed for higher employment, economic growth and stronger dollarization. But the country needs reform to strengthen future bond payments through higher growth and fiscal consolidation.

Ecuador has held 11 referendums since 1978 to either legitimize the president and the political or economic agenda or bypass an unfriendly legislature through direct democracy. The last referendum under President Moreno in February 2018 unwound the autocratic laws of the Correismo and allowed for a transition back to democracy. This was the triumph of the Moreno administration to bypass the hardcore Correistas and appeal to the conciliation of the voter base.  President Moreno launched the referendum within the first year of his mandate to best leverage a high 70% approval ratings. There was some initial criticism that President Moreno put a political agenda ahead of an economic agenda; however, the voter base clearly wanted a shift away from the autocracy and corruption of Correismo.  The success of the 2018 referendum was uniform across the seven questions with high thresholds ranging from 63% to 73% and not too different from the 70% approval rating for President Moreno.

The challenge for the Lasso administration is the inconvenient launch of referendum late in the mandate at lower approval ratings and the focus on more controversial economic rather than political topics. The timeframe is to coincide the referendum with local elections on February 5, 2023 with potentially 12 to 15 questions. There are no other obvious alternatives given an obstructionist legislature and the high stakes of snap elections.

The success of the referendum will require extensive socialization across all relevant sectors, similar to the consultations in Costa Rica ahead of their International Monetary Fund program. The society tends to reflect a far-left ideology, legacy of the entitlement culture of the Correa administration. There isn’t yet broad support for the economic agenda. However, the economic topics are far from controversial with a focus on employment, security and political reform. The latest surveys show that voters put security concerns and jobs ahead of all other topics on high 70% underemployment and low 15% to 20% approval ratings for the judiciary system. The latest Click survey also shows the frustration with the Assembly on the amnesty of politicians and rejections of the investment reform with broad support for either a sudden death/snap elections at 61.3% or a referendum at 52.11%.

The process includes submission of specific questions to the constitutional court for review within 20 days (cannot modify structure of the State or restrict rights) and then an executive decree to convoke the CNE to launch the referendum (maximum of 60 days after convocation).  This took five months under the Moreno administration from inception to launch. The Lasso administration projects a lengthier process with careful consideration of the specific questions and important marketing campaign. It’ll be imperative to monitor the popularity of the Lasso administration. The boost of 40% approval ratings to comfortably above 50% should benefit from the economic momentum of the oil boom with an opportunistic strategy to appease social and political pressures and also launch an effective marketing campaign. The opinion polls will monitor the voting tendencies ahead of the referendum similar to any election cycle (earliest polls from 12/12/2017 ahead of the 02/04/2018 referendum).

There is still significant political and policy risk premium embedded within the distressed 10% yields on whether or not there is commitment to economic reform.  There is a low correlation to oil prices since total returns are more dependent upon medium-term debt sustainability and structural as opposed to temporary shocks. The debt restructuring provided significant upfront liquidity relief with relatively low carry near-term returns and backloaded payments that depend upon medium-term debt sustainability. The break below to normalized yields and the 8.3%-10.6% trading range for the 5% ECUA’30 will require either a successful referendum to broaden the reform agenda or an unilateral strategy to develop strategic sectors in oil and mining.

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

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