Ecuador Investors Brace for Populism Comeback in Snap Election

·4 min read

(Bloomberg) -- Ecuador bonds sank on Wednesday after President Guillermo Lasso opted to dissolve congress and call for early elections in a bid to avoid impeachment.

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Debt from the South American nation posted some of the biggest declines in emerging markets, with bonds due in 2030 sliding as much as 5.3 cents to about 46 cents on the dollar, the lowest in more than a month, according to indicative pricing data collected by Bloomberg. The extra yield investors demand to hold Ecuador’s debt jumped more than 80 basis points to 1,860, according to JPMorgan Chase & Co. data.

Ecuador’s bonds have handed investors losses of 19% this year, the third-worst in the developing world, according to an index of peers. The selloff began in February, when traders took Lasso’s defeat in a constitutional referendum as a sign of his weakening mandate. Since then, the opposition-led National Assembly has started a second impeachment bid for the former banker, who took office nearly two years ago.

Read more: Ecuador’s President, Facing Impeachment, Forces New Elections

The snap election opens the door for the comeback of a left-leaning leader in a nation that has defaulted 11 times on its overseas bonds since its independence in 1830.

Allies of former President Rafael Correa won key local races in a February vote held the same day as Lasso’s failed constitutional referendum. The results marked a comeback in support for Correa, who stung markets in 2008 by defaulting on most of Ecuador’s overseas debt and labeling bondholders as “true monsters.” Facing an eight-year jail sentence for graft, he’s barred from running for office himself, and has been granted asylum in Belgium.

Here’s what investors and economists are saying:

Barclays economist Alejandro Arreaza

  • “For now it’s six months of uncertainty until we have an election”

  • “In principle Correísmo would start off as the favorite, given the results of the election in February,” but still “too early to have certainty of what may happen”

Citigroup strategists led by Dirk Willer

  • Lasso’s “mutual death” — or muerte cruzada in Spanish — move was the baseline scenario, but “will lead to increased political uncertainty”

  • See chances of public demonstrations and potential for “a constitutional crisis if the National Assembly decides not to obey the decree”

  • “Opposition lawmakers have already warned Lasso that, in their view, calling for the Muerte Cruzada to escape the impeachment vote would be illegitimate”

  • “It may be that Lasso is able to prevail,” they wrote

  • “Correísmo is in a very strong position to benefit most and, as such, could win the presidential elections”

Katrina Butt, a senior economist at AllianceBernstein in New York

  • “Ecuador faces considerable uncertainty at this juncture. In the near term, there’s potential for street protests and economic fundamentals are likely to deteriorate as the administration ramps up spending and cuts taxes in an attempt to boost its popularity ahead of the vote”

  • “The possibility of unorthodox policy under a Correísmo or Pachakutik president further increases negative sentiment”

Sergio Armella, Goldman Sachs economist in New York

  • “Ecuador’s willingness to service its obligations remains top of mind for investors,” he wrote.

  • “While newly elected officials will have to avoid fiscal profligacy, the administration that serves the next term (i.e., starting in 2025) will have to exert greater fiscal discipline and effort to service its debt”

Oren Barack, managing director of fixed income at New York-based Alliance Global Partners

  • “There will likely be local turmoil and volatility with their debt in the short term”

  • “It clearly demonstrates how politics, particularly in the current environment has become the sole focus of the Assembly instead of the ordinary Ecuadorians. In an ideal world Lasso would never have had to take this measure. Plain and simple this is a Hail Mary/last ditch effort to bring a resolution through a new election.”

Siobhan Morden, managing director for Latin America fixed income at Santander in New York:

  • “Historic low bond prices already discount worst case scenarios. If we assume that near-term low Eurobond payments are not at risk, then there is latent upside optionality from a sudden break in policy paralysis that may provide an opportunity for stronger governability after the political transition”

  • “This may offer an opportunity to buy into weakness, especially considering the strong technicals with attractive valuations and stronger positions after the recent buyback”

  • “These push/pull forces suggest frictions that stabilize bonds at low levels and the rational for our neutral recommendation through this political crisis”

Ramiro Blazquez, head of strategy at BancTrust & Co. in Buenos Aires

  • “Populism has a significant chance of staging a comeback if we have elections. In any of the scenarios, bondholders lose”

  • “Vice President Borrero taking over from Lasso seems to me the best-case scenario for bondholders, since it avoids an imminent political risk, but chances that he completes the Lasso term and/or can resist major pressures for sharp spending increases are slim”

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