By Valerie Hernandez, International Banker
On June 2, Guillermo (Alberto Santiago) Lasso (Mendoza) announced that he would not compete in the upcoming general elections on August 20, which will determine the next president of Ecuador and the new congressional representatives. Lasso triggered the snap elections after he sparked nationwide controversy by dissolving the National Assembly (Ecuador’s legislature) to avoid facing an impeachment trial on May 17 and thus ruling by decree until the elections. Lasso may have averted a major political crisis by deciding to stand down and not seek another term. But with potential presidential successors ranging across the political spectrum, the impacts of the elections on Ecuador’s economy remain undetermined at present, but they could be profound.
“This is a democratic decision, not only because it is constitutional, but because it returns the power to the Ecuadorean people. As of today, the government will issue a series of decrees of laws that comply with the express mandate of the people,” the right-wing Lasso, who at the time had an approval rating of less than 14 percent, announced in a televised address upon dissolving the opposition-controlled congress. Surprisingly, this action was deemed legitimate, with Lasso having invoked a clause in the 2008 Constitution of Ecuador known as “mutual death”, which enables the dissolution of the legislature by the president and the calling of early elections whilst governing by decree in the interim.
As such, his required appearance to face an impeachment trial upon allegations of embezzlement involving the state-run oil shipping company Flopec (Flota Petrolera Ecuatoriana) in 2018, three years prior to his becoming president, was cancelled. Nonetheless, several lawmakers had reportedly planned to occupy the Legislative Palace should Lasso activate the mutual death clause, but the entire complex was instead shuttered on the morning of May 17 and guarded by a heavy police presence. Military and police leaders also issued statements at the time recognising the legality of Lasso’s actions.
With former banker Lasso having confirmed that he will not seek re-election, a major political crisis may have been averted should the upcoming elections progress without any further problems. But while the outlook for political stability has improved in Ecuador, the same can’t be said for its economy, which remains in a decidedly precarious position. The Latin American nation has faced a raft of prominent economic and social challenges this year, struggling to overcome an increasingly hostile environment of violent crime and drug trafficking amidst a weakening economic environment that has failed to rebound from the significant damage unleashed on the country by the COVID-19 pandemic.
The snap elections in August present Ecuador with a multitude of candidates representing diverse political ideologies, and as such, the event will prove crucial in determining the future direction of the Ecuadorian economy. Competing for the president’s office, the candidate list will include a member—as yet to be determined—from the opposition left-wing populist Correísmo movement of Rafael (Vicente) Correa (Delgado), the former president from 2007 to 2017. Lasso’s decision to bow out will most likely boost Correa’s chances of regaining the presidency, which, in turn, should prompt a sharp diversion away from the market-oriented policies of the current administration and towards massive boosts in social spending.
Indeed, the opposition party is keen on drastically escalating government spending to boost economic development in the country. “Right now, Ecuador accommodates particular interests without building a vision for the country,” capital city Quito’s mayor, (Christian) Pabel Muñoz (López), an ally of Rafael Correa, explained to Bloomberg in April. Muñoz has called for a hike in public-sector investment to 14 percent of GDP (gross domestic product), which would return it to levels last seen during Correa’s former tenure. “We’re ready to get the country back on that development track.”
But while public services may well receive a welcome boost, the country could incur economic problems should Correísmo repeat the same policies of 15 years ago, particularly regarding the country’s debt repayments. Perhaps most undesirably for Ecuador this year was being labelled in late May as the emerging market with the worst bond performance in the world, shortly after Lasso decided to dissolve the National Assembly and trigger a snap election. Despite being priced positively at the start of the year based on renewed optimism within the emerging-market space at the time, Ecuador’s benchmark bond prices soon experienced a pronounced collapse. The horror show began in February when voters rejected all eight proposals of a constitutional referendum put forward by Lasso in response to the emergence last year of indigenous group-led nationwide protests, largely in response to soaring food and fuel prices, which escalated into deadly violence.
The rejection aptly demonstrated that Lasso did not have the strong political backing in the country as was previously assumed, triggering a dramatic slide in Ecuadorian bond prices as his less market-friendly political opponents gained traction and sought to oust him from power. “Lasso’s political capital has been on a steady decline since the protests broke out in June last year, with every political actor in Ecuador smelling blood since,” Patrick Esteruelas, head of research at Emso Asset Management, told Bloomberg in early April.
Indeed, Bloomberg data as of May 22 showed that Ecuador’s bonds had crashed by more than 20 percent this year, largely on concerns that an incoming Correísmo government would cease making repayments on its debt and inflict massive haircuts on creditors’ holdings, as was the case during the Correa administration, when he labelled bondholders as “true monsters who won’t hesitate to crush the country”.
“Correísmo ended in default before, and thus investors will need to worry again,” Guido Chamorro, the co-head of emerging-market hard-currency debt at Pictet Asset Management, told Bloomberg on May 22. “We can price in fiscal deficits, current account deficits. But political uncertainty? Good luck.”
Perhaps more encouraging, however, is that Ecuador’s debt obligations and repayment schedule on bonds due before 2026 are quite manageable. The Ministry of Economy and Finance also noted that around $46 billion is currently held in overseas debt, of which only $16 billion is in bonds. But given that the country has defaulted on 11 occasions since achieving independence in 1830—the most recent being the sovereign debt default of 2020, at the onset of the pandemic—investors are reportedly pricing in at least a 90-percent probability that Quito defaults once more within the next five years.
Not all of Ecuador’s bond-market fortunes have been as disastrous this year, however. On May 9, Quito sealed the world’s largest-ever “debt-for-nature” swap deal by issuing a new “blue bond” that will allocate more than $12 million annually toward the conservation of its Galápagos Islands, among the world’s true nature and biodiversity hotspots and home to several species found nowhere else on earth. The $656-million Galápagos Marine Bond will be active until 2041, providing investors with a 5.645-percent coupon rate, despite some Ecuadorian sovereign bonds currently yielding more than 25 percent. To lower the risk, moreover, the bond is structured with an $85-million “credit guarantee” from the Inter-American Development Bank (IDB) and $656 million of political-risk insurance from the U.S. International Development Finance Corporation (DFC). And some estimates suggest that the bond will trim Ecuador’s debt by more than $1 billion once the $450 million of total conservation spending is considered. As such, the bond could become a shining example for other indebted nations that are home to abundant natural riches and require improved conservation standards.
If no candidate for president wins more than 50 percent of the vote in August, a run-off will occur on October 15. Lasso will govern by decree, overseen by the Constitutional Court, until the new president is seated. In a video message later posted on Twitter, he said he would use the next few months to fulfil his plans for the next two years. In a bid to garner support from voters, Lasso cut taxes shortly after dissolving the legislature, which Morgan Stanley estimates will cost around $200 million.
The elections could also prove hugely vital from a global geopolitical perspective, particularly since China-Ecuador relations have flourished in recent months, and not least since free trade between the two nations was rubber-stamped on May 11—thus providing further evidence of China’s increasingly commanding economic influence in the region, having already signed free-trade agreements with Peru, Chile and Costa Rica. The Quito government has confirmed that the deal allows preferential access for 99 percent of Ecuador’s current exports to China, with a particular focus on agricultural and agro-industrial products, including shrimp, bananas, cut flowers, cocoa and coffee, as well as helping Ecuador gain significant footholds for several non-traditional exports, such as pitahaya, pineapple and blueberries, in the Chinese market. As such, the trade ministry projects a $3-to-$4-billion gain for the country’s exports over the next 10 years.