The Big Idea
Ecuador | Election shock
Siobhan Morden | August 11, 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.
Latin America has not seen the assassination of a presidential candidate since 1994 in Mexico, so the death of Ecuadorian candidate Fernando Villavicencio comes as a shock. Beyond a tragic personal loss, it represents a setback to Ecuador and its institutions. Ecuador’s president, Guillermo Lasso, declared a 60-day state of emergency to ensure security for the August 20 elections. The resiliency of bond prices in the immediate aftermath suggests a quick reevaluation of likely election results, especially stronger conviction about a possible loss for populist Correismo candidates and a win for more conservative candidates focused on security.
There are no more polls before the August 20 elections. The latest events could further dampen Correismo support, encouraging an anti-corruption backlash and boosting the candidate with the strongest security credentials. This would strengthen conviction on a loss for Correismo in the first round of elections and stronger likelihood of a a moderate political transition.
There may also be backlash against the center-left ideology of Correismo with still high uncertainty on the outcome of the referendum of the Yasuni oil field. The technicals also provide support with bond prices at default levels and may even invite buyers expecting a backlash against Correismo and even a wake-up call to fix political and economic problems through an ideological shift to the center.
Correismo in the first round
There is much deserved criticism on the reliability of polls in Ecuador and across the region. This is particularly the case on a competitive first round, high protest voters and much uncertainty after latest events. There have been many polls since July and one dominant trend – that Correismo doesn’t benefit from a first-round win. This is still the case for the final polls with not enough of a bump in approval ratings and not enough blank/null votes for valid votes to reach the 40% threshold of a first-round Correista win. On referencing the most reliable pollsters – Cedatos and Ipsos – the Correista support is just below 30% and not a track record of enough momentum to cross the 40% valid vote threshold. There are quite a few pollsters including Tracking, Numma and Cedatos that do not show a trend of higher Correista support through July (Comunicaliza the exception). If we assume the high 18% blank/null votes from Cedatos than 26% Correista support increases to 32% valid votes (that doesn’t reach 40% even if absorbing all of the 5.8% undecided voters). The math on Correismo support is lower with Ipsos; however it could be quite tight IF support breaches above say 32% and there are 20% blank/null votes.
The latest events could be quite relevant. 1.) The controversial debate about dollarization may backfire against Correismo with dollarization the most popular politician (as the saying goes) while Vice President candidate Arauz tries to disassociate from a prior interview where he endorsed digital dollarization. 2.) There was also much antagonism and tension between presidential candidate Villavicencio and Correismo with corruption allegations of narcotraffic ties to the Petro administration. The anti-corruption campaign of Villavicencio may heighten the voter preference against corruption and firmly keep Correismo below the threshold for a first round win.
On to the second round
This is now less clear as latest polls from Cedatos and Ipsos show the emergence of PSC-backed candidate Jan Topic. The last-minute surge from Topic may reflect the pro-security voter concerns and his unique military experience. The latest events should only strengthen this trend with potential for a breakaway from other main candidates of Yaku Perez and Otto Sonnenholzner. There are pros/cons of electability and governability under these different candidates on what should be another test for Correismo in the second round. However, the competitiveness of the second round will clearly depend on first round results. If Correismo support reaches a low threshold (say below 32%), then this will weigh on their competitive prospects for the second round and potentially benefit the more centrist candidate (Topic, Otto or even Yaku).
The Yasuni referendum
There are no reliable polls to gauge voter sentiment for the NO (shutdown) or YES (stay open) on the referendum of the Yasuni oil field. The media suggests that it’s a highly competitive campaign with CONAIE pushing its pro-environment agenda but then the reality closely hitting home on the loss of 1% of GDP in oil revenues for an under-developed region and a structurally high fiscal deficit. Will voters realize that they could lose their fuel subsidies? It’s not clear whether reality overtakes ideology on what remains critical oil revenues that represent the backbone of the economy in terms of growth, exports, and fiscal revenues and no obvious alternative growth model. The loss is not negligible and would only complicate already fragile finances (deficit of ~3% of GDP), subpar economic growth (~2%), and weak foreign investment (below 1% of GDP). It would also serve as another reminder that there are no institutions that understand the suboptimal economic reality and reinforce the weak governability of the next mandate. The referendum results would strengthen and/or dampen any potential relief of a Correista first round loss. It’s not yet clear whether a backlash against Correismo translates into a shift towards a more centrist ideology and policy management.
The governability is what matters most. The base case scenario of a moderate political transition is still insufficient to tackle economic reform without the collaboration from the legislature and the judiciary. The continuous setbacks on the reform agenda to discourage investment is almost alarming with no apparent understanding or appreciation for stronger growth and employment and no discussion about the economic growth model under constraints of dollarization. The short interim 15-month mandate may also prioritize a political over an economic agenda and further postpone difficult decisions. This all should continue to heavily discount the medium-term payments and trap bond prices within the same YTD trading range. The latest political developments may provide a shock to complacency and shift the political establishment towards a more collaborative effort to first recognize and then fix structural problems. This is what could provide some upside beyond a tactical bounce on the relief rally of lower political/policy risks on the loss of Correismo in the first round.