The Big Idea

Ecuador | Approaching a political inflection point

| January 6, 2023

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 year marks a unique political cycle for Ecuador. The country on February 5 votes on a referendum that will reform political, security and environmental laws. However, success will not remove roadblocks to economic reform that perpetuate weak dollarization, low growth and uncertain debt solvency. For the Lasso administration, success would only slightly improve weak governability. Eurobonds have taken a pause from quick year-end gains ahead of the referendum next month.  The successful referendum would only translate into moderate gains.

The political tensions remain high with an obstructionist majority opposition in the Assembly and ideological differences with Ecuador’s indigenous groups. However, it’s an intuitive strategy of the Lasso administration to tackle this political impasse with a referendum. The referendum is not a vote of confidence of the Lasso administration but rather a vote of no confidence in the legislature. A political strategy of weakening the legislature would capitalize on its low, single-digit approval ratings while also bypassing its authority with direct democracy on other social, economic and political issues.

The initial survey from the credible pollster CEDATOS shows 75% public support to weaken the legislature and endorse popular topics on democracy, security and the environment. The approval ratings of President Lasso may be low at 30%, but the approval ratings for the Assembly are dismal at 5.7% (latest December CEDATOS survey). This explains the high support for the question that proposes a reduction in the number of deputies. It will be important to monitor voting intentions over the next few weeks. Although the popularity of the questions should dominate, there are many special interest groups lobbying against the referendum, and 8% to 18% of voters remain undecided. The final results are based on simple majority per valid votes per individual question with partial or total success on the questions.


The “democratic” questions are a clear challenge to the Assembly and the CPCSS (Council of Citizen Participation and Social Control) on reducing the size of the Assembly from 137 to an estimated 121 deputies,  reducing the number of political parties as well as allowing the Assembly to select CPCSS officials through a meritocratic process as opposed to popular elections. This may resolve the political fragmentation and policy paralysis with better overall accountability and legislative cooperation. The proposal to strengthen the meritocracy of the CPCCS would allow for stronger checks and balances and less political interference amongst regulators.

The successful referendum would marginally strengthen the institutions for a smaller and more accountable legislature as well as marginally improving some security and environmental issues. There could even be some spillover gains for a small boost on approval ratings from the current low levels of 20%-30% for the Lasso administration. However, none of this suggests a game changer on still unresolved structural economic and political issues.

It would require considerable momentum to not only boost the popularity back above 50% for the Lasso administration as well as encourage broad-based collaboration to tackle difficult economic issues.  The social pressures reinforce huge spending entitlements such as fuel subsidies and bloated public payrolls. And there is no accountability on fiscal discipline with a rejection of tax hikes and any other efforts to attract foreign direct investment and develop strategic sectors.  The crux of the problem is a structural fiscal deficit and track record of default that limits access to capital markets and discourages foreign direct investment inflows. The fiscal improvement in 2022 on trimming the historical $4 billion to $5 billion budget deficit down to $1.9 billion was impressive. However, these gains depend on high oil prices while facing spending rigidity after capex cutbacks and higher debt service.

The bottom line is that the referendum could provide some marginal leverage to the Lasso administration. However, there is no quick fix to increase trend growth or decrease high structural spending. The political uncertainty may remain high. The role of the participation council is still fluid, and tension with indigenous groups continues. The Lasso administration also has to renegotiate a successor IMF program with an uncertain mandate for economic reform and uncertain budget assumptions (volatile oil prices, temporary tax hikes, budgetary rigidity and optimistic asset sales). The uncertain political and policy risks warrant a stubborn risk premium as the Lasso administration navigates through the next phase of an IMF program and the aftermath of the referendum.

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


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Siobhan Morden
1 (212) 692-2539

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