The Big Idea
Ecuador | First fallout
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Political risk premium finally has crept into Ecuador’s bond prices in the last month. Prices are highly vulnerable to the election cycle. This is especially true with the intensity of the country’s electricity crisis and the drag on consumption. There is no room for complacency in Ecuador sovereigns after years of downside surprises. Eurobonds are particularly vulnerable after an impressive 60% year-to-date return with the election cycle offering an opportunity for taking profits. Eurobond prices have since retraced back to the top of the well-defined year-to-date trading range. There should be no rush to add so many months ahead of elections cycle and with continuing uncertainty around election results.
The first snapshot of the popularity of President Noboa through the electricity crisis doesn’t look that bad. His disapproval rating increased since July to 56%, but his approval rating was relatively stable at 42%. This also comes from a possibly slightly biased pollster Perfiles de Opinion. It’s too soon to breathe a sigh of relief with October 9 not yet reflecting the worst of the electricity crisis that may continue into year end and next year. There also hasn’t been a poll showing the relative rankings among the candidates. Maybe President Noboa remains the frontrunner, or maybe not. This snapshot is maybe enough to anchor bonds after their recent weakness. However, it may not yet allow for adding to positions until there is stronger conviction about the moderate political transition. The stakes are high for the re-election of Noboa on February 9 and the strong leadership necessary for the International Monetary Fund program and commitment to pay bondholders.
Polls have been oddly scarce this month. There have been no updated voter intentions across the candidates, although there have been separate approval ratings for select political leaders. The polls on Noboa’s popularity aren’t so bad considering the intensity of the electricity crisis with blackouts reaching up to 18 hours. This represents fairly competitive support against a discredited Correista candidate and a fracturing of non-traditional candidates. The base case scenario still indicates a tight race for Noboa. The question is whether Noboa support has found a floor. There are two concerns:
- The latest poll reflects voter views in early October and doesn’t capture the worsening crisis through the month after Colombia cut off electricity exports in October, and
- Will Noboa’s support endure through a lengthy cycle of blackouts?
It’s still early in the election cycle, and there isn’t yet a resolution to the electricity crisis. There aren’t yet any complete polls to show broader voter support across the candidates. Are undecided voters migrating to Correismo or an alternative candidate like Topic? Is Correismo tapped out at 30% voter support and does their floor equal their ceiling? The base case is clearly a runoff round with a moderate candidate against Correismo. Let’s not underestimate the Correismo threat as a competitive candidate at 48% versus 52% on the last runoff election in 2023. If we assume that Correismo remains the dominant opposition in the second round, then the weighted probability should still favor a moderate outcome not too far from the last election results. It is logical to assume a similarly tight race on the high disapproval ratings of Correismo and the higher disapproval ratings for Noboa and similar uncertainty on the tradeoff of stronger moderate alternative under higher policy risk. The next poll on voter intentions may show a much tighter race and reaffirm still consistent political risk premium. The political tensions should continue though a still unresolved structural and acute seasonal electricity crisis with maximum of 14-hour daily blackouts.
The Noboa administration is adopting more aggressive tactics to lower the electricity deficit with bilateral meetings with the Colombians to resume electricity exports and operating thermal power plants on liquid fuels. This aims to reduce the shortfall in December and buffer what could be blackouts until the rainy season in February or March 2025.
The local headlines nevertheless remain skeptical on covering the 2,000mw demand with continuing high risk of 1,500mw deficit in December without exports from Colombia and daily blackouts of eight hours. The bilateral diplomatic meetings seek perhaps a legal resolution on private sector exports late November from Colombia. The full impact of political risk isn’t probably yet absorbed in early October polls. This leaves bond prices still vulnerable to subsequent polls and the evolution of the electricity shortages into the election cycle. The moderate and effective leadership is critical to buffer against the political obstructionism and cultural populism, especially on the commitment to an IMF program. Eurobond prices may find some temporary support back within the Jan-Aug 2024 trading range after the recent weakness; however there is still risk of volatility until there is conviction for a moderate transition.
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