The Big Idea
Ecuador | Pivot to politics
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After surviving the first phase of austerity under the country’s new IMF program, Ecuador’s President Daniel Noboa now turns to winning a second term. Even though the economy should slow sharply this year, there isn’t much competition among the discredited political establishment. The opposition is weak and fractured. As for Ecuador’s debt, step-up coupons later this month should finally push current yield into double digits. Distressed bond prices also have room for further recovery back to recent highs, especially with supportive external risk. However, look for tactical opportunities to sell into strength at former price highs on continuing risk around fiscal adjustment and ambitious expectations of re-entering the Eurobond market next year.
A number of polls show approval ratings for President Noboa falling from a peak of 80% to now around 50%. This was a necessary sacrifice after committing to the IMF program and adopting unpopular austerity measures. However, it’ll be important to sustain current support. The latest Cedatos polls on July 4 reaffirm a 50% approval rating. It is encouraging that informally President Noboa’s ADN party has already reached a 29% minority (to near block qualified majority). This threshold is increasingly important since the override of the presidential veto was revised lower from a qualified majority to a simple majority. The strong governability will be increasingly important post elections on managing the populist and obstructionist political and social sectors. This is why ideally a first-round win and dominant control of the legislature (either first minority or simple majority) would maximize political capital for the next phase of the IMF program.
The latest Cedatos polls show a weak and fractured legislation with Correista candidates at 17% (Gonzalez) valid votes against 51% for President Noboa amidst no other formidable contender. The raw data shows 21.7% support for Gonzalez in the Comunicaliza poll (June 28) versus much lower 11.7% support in Cedatos (July 4). The Noboa/Gonzalez spread is 23.5% with Correismo much weaker after two consecutive losses. It is important to reference net support for President Noboa against the weakness of the opposition. This should imply low political risks so long as 1.) President Noboa maintains core 50% support against 2.) no breakaway opposition candidate quickly emerges over the next few months. There is also no room for policy backtracking on the importance of sustaining IMF relations (and budget financing) through the election cycle. This is why the Noboa administration should quickly reach a political or legal compromise for a status quo on policy management when/if President Noboa steps down for the campaign and allows Vice President Abad to manage the interim period.
It’ll also be important to monitor economic activity and any potential contagion to approval ratings with GDP growth expected to decelerate from 2.4% in 2023 to near flat in 2024. The national accounts data through the first quarter of 2024 shows a 1.2% year-over-year increase; however, there was broad based weakness across consumption and investment. The economic slowdown is the logical aftermath from fiscal austerity measures, lower oil production, security unrest and electricity blackouts. The risks are probably to the downside for an economic recession this year. Interestingly, consumer confidence indicators remain at multi-year highs through May 2024 with future expectations the strongest component. The challenge for President Noboa will be to sustain core support near 50% and benefit from another strong honeymoon through only a slow economic recovery as the IMF projects GDP growth at 1.2% next year.
There is a lot at stake with strong political capital necessary to reduce the political and policy risk premium, especially on the overly optimistic assumptions of renewing market access next year and a weaker presidential veto. There hasn’t yet been a positive shock to sentiment despite the back-to-back austerity measures with bond prices unable to recover to former price highs even after the reduction in fuel subsidies. This is why the political capital of the next mandate will be critical. There is no room for error under the scenario of fiscal gradualism and an aggressive timeframe for market re-entry. There is still some room for near-term optimism on distressed bond prices, high current yield on step-up coupons month end and resilient approval ratings against a weak opposition. The step-up coupons month end will shift current yield above 10% with upfront payments critical for distressed credits. This may encourage investor support, especially under favorable risk-on environment. However, we remain tactical with bias for profit taking on recovery back to recent price highs with the economic agenda soon shifting to the political agenda and high stakes to maximize political capital on fiscal gradualism and market re-entry.
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