The 2030 bond, which was priced at $0.69 for every dollar of debt on Friday, February 3, closed at $0.59 on February 6. Meanwhile, the bond that matures in 2035 went from USD 0.51 per dollar to USD 0.43.

 

Investment banks: fear grows that Lasso will not finish his term

The investment banks JP Morgan and Morgan Stanley warn that the results of the voting weaken the government of Guillermo Lasso.

Aquiles Álvarez and Marcela Aguiñaga, during their closing campaign in Cristo del Consuelo, this February 2, 2023.

The results of the sectional elections in Ecuador and the 2023 referendum fuel fears in international markets of an early termination of the Guillermo Lasso mandate.

Two US investment banks say so: JP Morgan and Morgan Stanley.

“After the results, the risks (on an early termination of Lasso’s term) have increased,” JP Morgan said on February 6, 2023.

JP Morgan does not take for granted that Lasso will not finish his term in 2024. The bank believes that the opposition is not aligned to achieve this end.

But the good performance of the correista party in the elections and the possible defeat of the “yes” in the referendum, leaves a ” very challenging political scenario ” for Lasso, warns JP Morgan.

Challenging scenario for Lasso

Lasso will have very limited room for maneuver to push through a fiscal consolidation reform agenda, adds the JP Morgan report.

And Morgan Stanley mentions that with the results of the elections, the international markets already assume that in 2025, when the Lasso government ends, there will be changes in economic policy.

Although the markets remain attentive to the price of oil and a possible new agreement with the International Monetary Fund (IMF).

Hence, the reports from the two banks mention that the risk of new episodes of social protest is increasing, which could unleash a destabilizing political scenario.

Added to the instability scenario surrounding Lasso are the latest reports of alleged corruption in public companies, says JP Morgan.

The price of the bonds

Siobhan Morden , managing director of Santander Investment Securities, explains that the “surprising” results will lead to falls in the prices of Ecuadorian bonds.

What worries the most is what will happen in 2025, when the Lasso government ends, since there is more pressure to pay the external debt, adds Morden.

Hence, the country risk indicator will also rise, adds José Xavier Orellana, a partner at the firm Ahead Partners.

The 2030 bond, which was priced at $0.69 for every dollar of debt on Friday, February 3, closed at $0.59 on February 6.

Meanwhile, the bond that matures in 2035 went from USD 0.51 per dollar to USD 0.43.

And the Ecuador bond that matures in 2040 fell from USD 0.44 to USD 0.36.

Morgan Stanley believes that bond prices could continue to fall as long as the political tension does not calm down and there are fears of destabilization of the Lasso government.

The former Finance Minister, Fausto Ortiz, says that among the alternatives that the Government can take to calm fears is that it carry out new operations to refinance foreign loans, such as what it did in 2022 with the debt with China.

You can also check that the debt you issue in 2023 has longer maturities so you don’t put more weight on the years in which the bonds mature.

Updated notice: At 18:34 on February 6, 2023, information on the prices of the bonds was added. At 11:50 a.m. on February 7, 2023, data was added from the Morgan Stanley report