Ecuador (Caa3/B-/B-), on which we have a Hold, is a trade to watch next year pending the outcome of its presidential election in February, with a yield on the 0.5% 2030 of 12.9% on a mid-price basis as of cob 11 December on Bloomberg (at a mid-price of US$65.3). The bonds are some 12pts lower than their first day of trading on 1 September after the restructuring (the longer bonds are down 6-8pts) and have missed out on the year-end rally.
Investors are waiting for more visibility over the political outlook, despite a restructuring that eases near-term payment risks and with policy discipline and financing reinforced under the new IMF programme. The main candidates in the election on 7 February are Andres Arauz, who is supported by former Ecuadorian President Rafael Correa, the conservative Guillermo Lasso of the Creo party and Yaku Perez, the indigenous Pachakutik party candidate, in a crowded field of 16 overall. Current president Lenin Moreno (PAIS party) is not standing. According to a recent Cedatos poll on voting intentions, Lasso is likely in the lead (just), with 23%, Arauz on 20% and Perez on 11%, although all the leading candidates have also seen a drop in support. In the face of low ratings and a fragmented field, it looks likely the election will head to a second round, although there is still plenty of time to go and there remains potential for surprises. Failure to win outright in the first round (50% or more, or more than 40% with a 10pts lead over the second placed candidate) will see a second-round run-off on 11 April. The new president will take office on 24 May.
Bonds would likely react favourably if Lasso is elected, but could fall on an Arauz victory. Lasso may be the market’s preferred candidate and he is more likely to stick to the IMF programme and policy orthodoxy (although implementation could still be a challenge). But he may face a tough challenge in a second round if the anti-market vote unites against him and may face obstacles from the left in Congress if he does win. Recall that Lasso lost to Moreno in the second round in the last election in 2017, although Moreno split from Correa, and ended up trying to be more orthodox and market friendly than we would have expected. Conversely, markets will likely be concerned by a leftist victory and the potential return, or influence, of Correa, under which willingness to implement the IMF reform programme may weaken.
But even before we get to February, the IMF programme may be tested again. The IMF approved a new US$6.5bn EFF on 1 October and staff-level agreement on the first review was announced on 23 November. Approval of the review “in coming weeks”, subject to completion of some prior actions, will provide cUS$2bn in financing. One of the conditions is passage of anti-graft legislation, which is currently going through the National Assembly, although timing is tight ahead of recess on 16 December, and given some political resistance and pre-election jockeying.
The IMF approved the first review of the new US$6.5bn EFF on 21 December leading to a disbursement of US$2bn (see link).
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