The Big Idea

Ecuador | Conflicting objectives

| July 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. This material does not constitute research.

The back-to-back shocks that have weakened Ecuador’s Lasso administration have forced a reassessment of popular long positions. The higher volatility and protracted weakness has also probably weakened investor sentiment as Ecuador shifts from the best performing credit so far this year to the worst. Current prices now seem to reflect worst-case scenarios including a sudden regime change or a shift toward policy heterodoxy. But current low bond valuations offer a buffer to a healthy part of the risk.

The worse of the opposition attacks have been averted near-term.  The challenge now for the Lasso administration shifts to CONAIE negotiations to avoid a political crisis and maintain economic stability.  It will remain difficult to balance policy objectives. The current low bond valuations should offer a buffer while oil prices still remain above budget, IMF relations remain strong and the Lasso administration rebuilds his mandate and negotiates with CONAIE over the next three months.

There have been several opposition efforts to oust President Lasso from office. None of these constitutional venues now look realistic.  The primary concern is whether the political and social pressures undermine the economic agenda and fiscal discipline.  It will require some serious and skilled political negotiations over the next few months with CONAIE.

There are three constitutional threats to remove President Lasso from office but none of them are (yet) viable.

  • The legislature has already tried to invoke snap elections under Article 130. There were three successive rounds that were unsuccessful in reaching the 2/3 necessary votes.  This is no surprise with many deputies unwilling to threaten their own re-election under the context of snap elections for both the legislature and the executive.
  • The opposition has also attempted to request a recall referendum of President Lasso under Articles 105-106. The CNE promptly rejected the request for insufficient proof that President Lasso failed to perform his duties. This looks like a hard no. The other hurdle is reaching the 15% necessary signatures required to launch a recall referendum. President Lasso’s popularity may have breached below 30%; however, the latest polls show a renewed appreciation for democracy and for stronger institutions.
  • The other alternative of impeachment under Article 129 seems technically the least likely as it requires a serious legal breach such as genocide, torture, embezzlement, etc.

Whether or not President Lasso is forced into an early exit depends on how he manages the social pressures in subsequent months. The Lasso administration is still trying to reinvent itself after the indigenous protests and breakdown on legislative relations. The recent cabinet reshuffle doesn’t necessarily bridge any political alliances or much alter public perception. The incoming Finance Minister Arosemena should pivot towards a dual social and economic agenda. There is not much flexibility under the IMF adjustment program. If offering only minor budgetary concessions, then it will require some political finesse through the current CONAIE negotiations to manage the social and political pressures.

The pressing concern for President Lasso is how to manage these fiscal concessions, especially without the anchor of an IMF program next year.  The public debate is long overdue on how to fund spending entitlements under the constraints of dollarization, saturation of local markets and restricted access to external markets. The next few months of CONAIE discussions will hopefully allow for a rational debate about budget and financing rigidity. This is the first hurdle – that allows for a political compromise with minimal fiscal slippage. The next hurdle is funding this permanent spending with higher economic growth in strategic sectors. The suspension of decree 95 and amendment of decree 151 complicates the plans to expand oil and mining production. The Lasso administration will have to manage these political constraints to still

If the Lasso administration doesn’t consolidate the fiscal accounts or attract foreign direct investment into strategic sectors for higher trend growth, then how will the country meet the restructured debt beyond 2025 once bond payments accelerate? This remains the overhanging concern for bondholders.  The current prices should soon find a floor of support at below 2020 recovery value levels and at recent worst levels of early 2021 when UNES candidate Arauz was leading the polls. The near 9% current yield is also reaching attractive levels for carry returns so long as prices stabilize near current levels.  The high oil prices and the IMF anchor are all supportive so long as President Lasso manages the social pressures and avoids a forced resignation.  It is also important to recognize the low rollover and repayment risk of deferred amortizations and near zero coupon payments. The upside gains remain dependent upon a successful growth agenda necessary for restructured bond payments once they accelerate in 2025-2026.

Siobhan Morden
Santander Investment Securities
1 (212) 692-2539


U.S. Fixed Income Trading Commentary Disclaimer

This commentary has been prepared by the U.S. fixed income trading desk of Santander Investment Securities Inc. (together with its affiliates, “Santander”) for its institutional investor clients only, and may under no circumstances be redistributed beyond the recipient in whole or in part.  The recipient is an “institutional account” as defined in FINRA Rule 4512(c) that (i) is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies and (ii) will exercise independent judgment in evaluating any potential investments and any recommendations of any broker-dealers.  For the avoidance of doubt, this commentary is not suitable for or intended for retail investors. 

This commentary has not been produced or reviewed by, and does not otherwise reflect the views or input of, the Research Department of Santander (“Santander Research”).  This commentary may conflict with the views of Santander Research, is not subject to all of the independence and disclosure standards applicable to research reports prepared for retail investors and is not independent from the interests of Santander.  Santander may have positions (long or short) in, effect transactions in or make markets in the subject securities (or related derivatives) mentioned in this commentary, and such positions or trading may be inconsistent with this commentary.  However, Santander is under no obligation to make a market in or otherwise provide liquidity in any security discussed herein.  This material may have been previously communicated to Santander’s trading desk.  Santander may have in the past or may in the future provide investment banking services (including underwriting activity and loans) or other services for the companies mentioned in this commentary.

This commentary has been provided for informational purposes only and is not a recommendation, offer or solicitation for the purchase or sale of any security or related instrument.  This communication is intended to be short term and brief in nature, and therefore does not provide a full analysis of any issuer or security or a sufficient basis upon which to base an investment decision.  The individual circumstances of the recipient’s investment objectives and needs have not been considered in this commentary, and nothing in this commentary constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to the recipient’s individual circumstances.  Information contained herein has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made as to its accuracy or completeness.  The recipient should not rely on this commentary for any investment decision or other action, and Santander expressly disclaims any liability for any losses arising from any reliance on or otherwise related to this commentary.  This commentary reflects the personal views of the individual sender of such commentary, and no part of his or her individual compensation was, is or will be directly or indirectly related to its content.  This commentary is provided as of the date and time thereof, and Santander does not undertake any responsibility to update or revise any of the information contained herein, which may change without notice.  Past performance is not indicative of future results.

Fixed income securities, including those described herein, are subject to many risks, including, but not limited to, interest rate risk, the credit risk of the issuer, inflation risk, liquidity risk and risk of a downgrade by rating agencies.  Emerging markets investments are additionally subject to political, economic, legal, regulatory, market, settlement, execution, currency and other risks.  Fixed income, and specifically emerging markets, investments are not suitable for all investors. 

Santander Investment Securities Inc. is an SEC registered broker-dealer, FINRA member and SIPC member.  Santander Investment Securities Inc. is a direct, wholly-owned subsidiary of Santander Holdings USA Inc., which is a direct, wholly-owned subsidiary of Banco Santander, S.A

Siobhan Morden
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

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.

The Library

Search Articles