Maria Elena Vizcaino | Bloomberg

NEW YORK
Energiesnet.com 02 09 2023

Ecuador, one of the few countries in South America with a conservative leader, saw its politics thrown into confusion in early February when President Guillermo Lasso received a double rebuke from voters. A package of constitutional amendments he proposed was voted down, to the surprise of pollsters and investors, and the left-leaning opposition had a strong showing for mayoral races in key cities. The country’s bonds plunged at the possibility that the market-friendly Lasso won’t be able to finish the two years left in his term.

1. What did Lasso propose?

The key referendum proposal was to allow the extradition of organized crime bosses to the US. This was an attempt by Lasso to bolster his popularity, which had suffered from a rise in drug-related violence. Other amendments focused on security, the environment and a plan to reduce the size of the national assembly.

2. What were the results?

With more than 98% of votes tallied, all eight constitutional amendments proposed by Lasso’s government failed, including the key extradition reform. In the same vote, former president Rafael Correa’s party scored victories in most of the major municipal races, including in the capital of Quito. His Citizen Revolution party also won the mayorship in Guayaquil, one of the nation’s most important cities — one that for 30 years had been the stronghold of Lasso’s Social Christian Party.

3. Why were the amendments rejected?

That’s puzzling analysts, since pre-election surveys by pollsters Ipsos and Cetadatos had shown the majority of Ecuadorians expressing support for all eight proposals. One line of thought is that voters opted to reject constitutional reforms solely to protest Lasso’s administration. The referendum “turned into an apparent plebiscite” on Lasso’s government, according to Barclays Plc. economist Alejandro Arreaza. 

4. What was the reaction? 

The outcome caught most politicians and investors by surprise. As results trickled in, the nation’s bonds plummeted, with notes due in 2030 plunging 10 cents on Feb. 6, the biggest single-day drop on record. Wall Street analysts argued the rejection of Lasso’s proposals weaken his mandate in the short term, while Citizen Revolution’s strong showing clouds the nation’s long-term financial outlook. 

5. Why could this bring Lasso down?

The results reinforce the nation’s current policy paralysis and dependence on high oil prices, said Siobhan Morden, a veteran sovereign debt strategist who’s specialized in emerging-market debt for the past three decades. The opposition-controlled national assembly already has a corruption investigation open against Lasso. That could be used as a vehicle for trying to impeach him, though that’s still seen as unlikely. Lawmakers failed to gain the two-thirds majority support needed to remove Lasso from office in 2022. Lasso’s term is set to end in 2025, but investors say his mandate is weaker going forward. That could leave him unable to enact the economic reforms they see as needed to promote long-term growth in the South American country.

6. Who are the alternatives?

Lasso said he plans to seek reelection, and indigenous leader Leonidas Iza is expected to take to the streets in the coming weeks or months as he looks to capitalize off Lasso’s weakness and elevate his national profile, Eurasia Group analysts Risa Grais-Targow and Yael Sternberg wrote. Former president Correa is exiled in Belgium.

7. Why are so investors so wary of political instability in Ecuador?

Even as international reserves are at record highs, debt payments in the coming years are minimal and the fiscal deficit has has narrowed under Lasso’s government, money managers are quick to flee when political uncertainty creeps into Ecuador. Since its independence 200 years ago, the country has defaulted on its external debt 11 times, most recently at the onset of the coronavirus pandemic. Minimal instability in the nation could dethrone one of the few market-friendly administrations in the region, leaving the reins in the hands of the opposition, a hard sell for investors who still have fresh memories of Correa’s debt default in 2008.

bloomberg.com 02 08 2023