Politics
Banker Beats Socialist in Ecuador Runoff After Surprise Surge
By- Guillermo Lasso, 65, will be sworn in as President in May
- Win by pro-market Lasso reassures bondholders amid IMF plan
Career banker Guillermo Lasso won Ecuador’s presidential election runoff after a late surge in the polls, preventing a return to socialism and reassuring bondholders in the default-prone country.
With 97% of the votes counted, the 65-year-old Lasso had 52.5% compared with 47.5% for economist Andres Arauz, a left-wing protege of former president Rafael Correa. The win caps a surprise last-minute comeback in the polls by the pro-market candidate in the final weeks after Arauz, who conceded defeat on Sunday’s vote, won the first round by 13 percentage points.
Lasso’s victory will likely be well received by investors when markets open Monday as he’s vowed to uphold a $6.5 billion financing agreement with International Monetary Fund and stay current on the country’s overseas bonds. The nation’s recently restructured notes rallied in recent weeks as polls showed his chances improving.
Why Ecuador’s Runoff Vote Matters for the Bond Market: QuickTake
While the bond market may breathe a sigh of relief, Lasso won’t have an easy time running the country of 17 million people which is far behind in its vaccination campaign and reeling from the economic impact of the pandemic. Last year the economy contracted 7.8%, its worst performance since at least the 1970s.
To govern successfully, he will also have to find a working relationship with the National Assembly, where his backers hold just 31 of the 137 seats. He will also need to reach out to the more than 1.8 million Ecuadorians who voided their votes, including many from indigenous movements.
Arauz, 36, had vowed to use central bank reserves to pay poor families and was expected to strengthen ties with left-leaning governments in the region including Argentina, Mexico, Venezuela and Cuba. He had obtained 32.7% of the vote in the first round of the elections in February, while Lasso edged into the runoff with 19%.
Lasso, a self-made millionaire and father of five, has been president of Banco de Guayaquil, one of the nation’s biggest private banks, and has also served as a regional governor and as finance minister. This was his third run for president.
The now president-elect has said he’ll promote policies that boost investment and private sector job creation, and will phase out a tax on taking money out of the country. He’s also promised to boost the monthly minimum wage to $500, from $400, and oversee the vaccination of 9 million people against Covid-19 during his first 100 days in office.
— With assistance by Philip Brian Tabuas
Why Ecuador’s Runoff Vote Matters for the Bond Market
ByVoters in Ecuador face a stark choice when they pick their new president in the April 11 runoff election. They can go with a conservative candidate promising free trade with the U.S. who says he can heal the wounds of a decade and a half of confrontational politics. Or they can choose the freewheeling spending and heavy government involvement in the economy pledged by the proxy of a popular and populist leader who knocked on China’s doors for loans. The election will be watched beyond Ecuador’s borders, including by bond investors.
1. Who are the candidates?
Guillermo Lasso, 65, is a career banker from the coastal hub Guayaquil. He was the favored candidate of conservatives earlier in the campaign and, since the first-round vote on Feb. 7, he has won endorsements from politicians across the political spectrum. Left-wing economist Andres Arauz, 36, is the protege of former President Rafael Correa, a still-popular socialist in exile in Belgium, having been convicted in absentia for graft. While Arauz won the first round by 13 percentage points, putting him clearly ahead in the race, recent polls suggest a close fight for the runoff. Still, in the first round polls diverged significantly from the results, adding uncertainty to Sunday’s vote.
2. What do the candidates promise?
Lasso says he’ll strengthen investor confidence, cut red tape and increase private-sector hiring. He promises to raise the minimum wage to $500 a month and to fix a public health care system hit hard by Covid-19, picking a doctor as his running mate. In an appeal to younger voters, he pledged to put open-pit mining, a controversial environmental issue, to voters and to strengthen the rights of women and sexual minorities. Arauz promises to kickstart growth by distributing $1,000 each to 1 million needy families from central bank reserves in his first week as president, to provide $3 billion to local governments and to revive infrastructure programs carried out by his mentor. He also wants judges to review the case against Correa and allow him to return from exile.
3. What’s the issue for markets?
Ecuador is notorious in the bond market as a serial defaulter, having restructured $17.4 billion in debt just last year and owing $45.4 billion in total foreign debt. (Ecuador uses the U.S. dollar.) Investors will be on alert for signs that the next government will honor the terms of that agreement. The new administration will also be judged on how it maintains austerity measures required under a deal inked in September with the International Monetary Fund. Arauz’s pledge to raid central bank reserves for the $1 billion stimulus payment would break the terms of the IMF deal that could cause a selloff in the new bonds and further threaten the nation’s debt sustainability. A victory by Lasso, in the view of one strategist, would trigger a rally and bring the nation back to international debt markets by 2022.
4. Has the IMF deal stabilized the economy?
The IMF front-loaded $4 billion in the $6.5 billion rescue package in the second half of 2020, representing approximately 4% of the country’s annual gross domestic product. This influx of money allowed the administration of President Lenin Moreno to largely stay current with civil servants and pay off some debts to government contractors, in turn allowing them to pay salaries and debts. Ecuador’s economy shrank 7.8% in 2020, according to the central bank, even with the IMF’s help.
5. What’s the backdrop to all this?
From his exile in Belgium, Correa played a key role in picking Arauz, a relative political unknown, to carry on his legacy. Correa featured prominently in ads and on posters until they were banned by the National Electoral Council on the grounds that his conviction had stripped him of the right to campaign. He remained heavily involved during the campaign through social networks and interviews with local media. During Correa’s polarizing presidency, from 2007 to 2017, Ecuador’s relations with the U.S. soured as he aligned the country with Cuba, Venezuela and Iran. China became a crucial lender, providing billions for infrastructure built by Chinese companies. Since 2017, under Moreno, Ecuador restored ties to the U.S., and in the last days of Donald Trump’s presidency, the U.S. International Development Finance Corp. struck a deal to help Ecuador repay billions of dollars owed to China. Lasso would keep Ecuador aligned with Western democracies.
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