The Big Idea

Ecuador | Polls, politics and debt performance

Siobhan Morden | July 28, 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.

It still looks likely that the left-populist movement backed by Ecuador’s former President Rafael Correa will get defeated in the first round of upcoming elections with a runoff in November. First-round results rarely deliver much clarity, with a lot of candidates on the ballot, a lot of undecided voters and an unusually short campaign. But things typically look much more decisive in the runoff. Circumstance still points to a Correista defeat. And along with supportive technicals on Eurobonds, that explain this month’s relative outperformance for Ecuador and our tactical relative value recommendation.

A few trends have emerged out of the polls. Most importantly, the Correista core support isn’t enough for a first-round win. Eight presidential candidates have split the voter base while high rejection rates for Correismo should keep the movement from breaking above a 30% ceiling. It also doesn’t help that former President Correa chose a candidate more for loyalty than any other winnable traits. The first-round win for Correismo would require high blank or null votes to approach an unusually high 40%. That would shift the core 30% support closer to 40% of valid votes and provide incremental gains for Correismo over the next three weeks. The Correismo rejection rates may have less impact as voters put security concerns over corruption concerns. However, there is no specific campaign strategy to attract more supporters. The Comunicaliza pollster continues to directly measure anti-Correismo sentiment with 45.8% saying that “the best for the country is a government that isn’t anti/pro Correismo” with voters looking for a centrist or compromise alternative.

The election uncertainty is always high in the first round. The recent first round in Guatemala is the perfect example with a runoff round of an unknown candidate (Semilla) that wasn’t expected to advance to the second round. There could be similar trends for the first-round elections in Ecuador.

The rejection of the political establishment, which would equally impact Correismo as maybe the only traditional candidate
Higher-than-expected blank or null protest votes, although not the same active campaign like in Guatemala to encourage the high 24% blank or null protest voters, and
A preference for the independent or outsider candidate

There is not a clearly dominant independent candidates and continuing uncertainty on who faces Correismo in the second round. There is not the same track record and visibility of these pollsters, but it may not matter much since the majority of pollster face high estimation error on the first round with voter intentions perhaps only clarifying days ahead of the August 20 vote.

The latest poll from Comunicaliza shows a trend after the release of three polls from June 18 to July 26. The Correista candidate did edge higher to 28.6% but still pools far below the 40% of valid votes necessary for a first-round win. The blank or null votes remain reasonably low at 13.6% and not the 40% necessary to push 30% support close to 40% of valid votes. There would instead have to be a consistent trend of consecutive gains for Correismo momentum to reach closer to the 40% threshold. The analytical breakdown of the 14.5% undecided voters from Comunicaliza further splits the voters with the dispersion further undermining a first-round win. The Correista biased pollsters (Maluk, Estrategas) also suggest that there isn’t much upward momentum for a first-round win while a composite of all of the polls reaffirm still a threshold of Correista support below 30%.

There is not much if any certainty amongst the non-Correista candidates. The market-friendly preference for former Vice President Otto Sonnenholzner still leads the pack at 12.6% but not enough of a margin at 3% differential to the other centrist candidate Fernando Villavicencio. The higher rejection rates for indigenous candidate and former presidential candidate Yaku Perez may explain the 2.2% decline in voter support that now pushes him further behind the pack. This, on the margins, may benefit the more centrist candidates like Otto and Villavicencio for a more market friendly second round.

The political risk continues to weigh on low bond prices. However, these risks still look supportive for both a Correismo first round defeat and a moderate non-Correista runoff round. This supports our near-term bullish tactical view on Eurobonds, especially on supportive technicals of distressed valuations, step-up coupons and high beta status through broadly supportive external risk.

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

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