The Big Idea

Ecuador | Impeachment or snap elections

| March 31, 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.

Ecuador’s political crisis now quickly escalates after the impeachment endorsement from the constitutional court. The next logical path is for the same political and social pressures to encourage two-thirds of deputies to vote for an impeachment.  However, this is where President Lasso has leverage.  If the vote looks to shift against President Lasso, then he can call for snap elections. President Lasso will likely try to manage the situation with less concern about the aftermath of social unrest.  There are huge uncertainties on what might follow snap elections. This would argue for low bond prices, but the low 30 recovery value should put a bound on valuations

There are still a few steps ahead of sudden death snap elections. The impeachment process now heads to the Assembly with a little over a month before a floor vote. President Lasso plans to first defend himself against the allegations, which is the first phase of the impeachment process ahead of the floor vote. President Lasso will then determine whether he risks allowing for a floor vote—that wouldn’t reach the 2/3 threshold—or whether he interrupts the floor vote and convokes sudden death snap elections as a last resort to avoid an impeachment.

It’s probably fair to assume that the Assembly will probably suffer the same social and political pressures as the Constitutional Court on supporting an impeachment. If President Lasso is at risk of losing power through impeachment, then he will likely step down for new elections as opposed to the alternative of having Vice President Borreo finish the term through 2025. The sudden death snap elections is a much more preferable outcome that avoids the reputational stigma, retaliates against the opposition and provides some policy flexibility on six months of issuing executive decrees. The threat of social unrest from the indigenous group CONAIE is less relevant. The recent polls show overwhelming support for snap elections that would include the Assembly based on their single-digit approval ratings. The snap elections of both the legislature and the executive is probably a more popular alternative than the impeachment and departure of only the Lasso administration.

There are both near-term and medium-term implications from the court decision. This sets a worrisome precedent for any future weak leader as well as reinforcing the tendency for populism and policy paralysis.  It’s almost like Ecuador now has the same high political risks as Peru but without the strong fundamentals. This isn’t a great combination. The immediate implications shift to who next replaces President Lasso. It’s almost impossible to assess the political landscape with polls showing a rejection of all the high-profile politicians and no other obvious candidates under the prospects of a sudden election cycle. The same candidates from the 2021 presidential elections may recycle themselves once again with a few center-left moderates including Yaku Perez and Xavier Hervas.  There are a few other candidates, mostly traditional politicians that are all vying for leadership within the legislature, and no recent polls to capture their approval ratings. It’s only a brief three months to define the candidates.

The resurgence of Correismo in the local elections suggests still their dominant presence.  This is what most concerns bond markets based on the legacy default of the Correa administration.  There are now highly visible Correista candidates as mayors in both Quito and Guayaquil, though only just a brief tenure without national visibility. It’s probably fair to assume that a Correista again heads to a runoff round with no candidate strong enough for a first-round win.  The most important question is whether you can translate the Correismo strength in the local elections for a sufficient boost for mainstream support. It was their high rejection rates that allowed for a center-right win for President Lasso in 2021 under the knee-jerk interpretation of anyone other than Correismo. This will be put to the test on the next round and whether you can translate regional voting trends to the national level. The early interpretation is that the political transition should shift to a moderate policy transition under a center-left candidate.

The initial reaction to the constitutional court ruling was fairly muted after bond prices had already migrated back to the lows. The 30 historic recovery value represents really firm support for the ECUA’35s and ECUA’40s. The dominant view is now for new elections. The political and policy transition could be better or worse, but prices are already at worst levels. On a positive viewpoint, the prospects for snap elections would break the political stalemate and could provide optionality for stronger governability to fix macro problems. The alternative scenarios of Vice President Borreo as a replacement or the survival of the Lasso administration of a failed impeachment both probably perpetuate the status quo of policy flexibility and oil dependence. The near-term bond payments are low at only 0.5% of GDP with two years until payments escalate to 2% of GDP a year. These scenarios should all provide some interim support that reinforces the floor at current price levels and validates our neutral wait-and-see strategy. The ability/willingness to pay will depend upon the policy bias and political capital of the next administration with still low rollover risks though the next two years. The 2035s and 2040s, outperformed the higher cash price of the 5.5% 2030s on their more defensive low cash bond prices. It’s a tradeoff between price protection versus high carry ahead of the event risks; however the initial reaction suggests some interim stability.

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

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