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Ecuador: Choosing Between the New Way or the Populist Way

As Ecuadorians prepare to vote on Sunday, international capital markets are watching closely to see if the country becomes the next Latam “miracle” or decides to stick to its populist ways.

Mar 31, 2017 // 2:46PM

The Ecuador elections that are set to take place on April 2 could represent a significant shift in the country's economic policy after ten years of populist rule.

Last year, was a year of change for Latin America; many left-wing leaders, who had been ruling over the past decade, left office to give way to officials with a much more "market friendly" approach.

Mauricio Macri in Argentina, Pablo Kuczynski in Peru and Michael Temer in Brazil have all represented a significant policy change in their respective countries.

This wave of change sat well with international markets and investors who since have accumulated a substantial amount of these sovereign’s debt.  That has reflected an improvement in the country’s interaction with the debt markets.

As soon as Macri took office, the sovereign spread against the US Treasury was reduced by almost 100bp. A similar thing happened when Dilma Rousseff was removed from her post and replaced by Temer in Brazil.

Now the spotlight shines over Ecuador, as next Sunday its citizens are set to elect the replacement for Rafael Correa, who has ruled the country for ten years and is one the few left-wing leaders remaining in the region.

The choice is between the vice president Lenin Moreno and the banker, Guillermo Lasso; both obtained the majority of the votes in the first round in February.

Lenin Moreno, the political heir of President Rafael Correa, is a socialist veteran who won the first round with 39,36 % (3,716,343) of the votes and is today leading the polls.

Guillermo Lasso, the opposition candidate and member of the conservative party CREO, managed to close the gap with Moreno. He got 28,09% (2,652,403) of the votes and managed to secure a place in the second round of elections.

This is the second-time Lasso, the major shareholder of Banco de Guayaquil, has run for president: in 2013 he lost to Correa, who got over 50% of the votes.

However, in the upcoming elections, some analysts believe that even though Moreno is leading in the polls, Lasso could rally all the opposition parties behind him and oust the incumbent Alianza Pais.

The Markets are Watching Closely

For Edwin Gutierrez Head of Emerging Market Sovereign Debt at Aberdeen Asset Management the “knee jerk reaction to a Moreno victory would naturally be negative,” however, he mentions that the market has already priced this expectation in the Ecuadorian securitie..

Conversely, he believes that there would be a “pop” in Ecuadorian bonds should Lasso win. He does warn that this rally would probably won’t last very long as either one of the candidates would end up facing an uphill task.

“While Lasso will undoubtedly look to engage the IMF, his ability to secure a deal (or perhaps most importantly, implement the transaction) would be encumbered by the fact that Alianza Pais would still have a majority in the Congress and that all the major institutions in the country would remain aligned with President Correa” he concluded.

Even though the country entered a recession in 2015 - mostly due to falling oil prices - the sovereign bonds are still very appealing to foreign investors.

The B-rated sovereign 2022 bonds pay a 10.75% coupon, a lot higher that what Argentina is paying for its five-year notes at 6.25%.

However, in a past report, Fitch’s rating gave the county a negative outlook, as they believe the burden of their external debt, which has quadrupled in the last four years, and the oil prices could pose some serious problem for Ecuador’s economic future.

As the country struggles to lift itself out of the recession, these elections could represent an opportunity not only for the country itself, but many investors waiting eagerly on the sidelines to see if Ecuador follows other Latam economies forward, or continues down its socialist path.

Americas Policy & Government

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