Will a new administration pay its debts? That is the big question looming for investment bankers. Ecuador’s history of defaulting on its debt justifies their concern.
Ecuador is entering a stage of significant political uncertainty, raising concerns among investors about the future ruling government following the calling of Cross Death by President Guillermo Lasso.
Investors fear that the next administration may refuse to honor the country’s debt obligations. The Cross Death decree issued by President Guillermo Lasso represents the worst-case scenario for investors and creditors holding Ecuador’s foreign debt.
While investors have confidence that the current government will fulfill its debt maturities within the remaining months of its term, the situation becomes increasingly uncertain afterward. This uncertainty fuels fears of potential debt payment disruptions or defaults, as explained by Juan Javier Jarrín, the research director of consultancy firm Inteligencia Empresarial.
Ecuador has defaulted on its foreign debt eleven times in the past, which further exacerbates investor apprehension.
Correísmo popularity raises investor’s fears
The primary question on investors’ minds is, “Who will govern after Guillermo Lasso’s tenure?”
International markets are apprehensive about the possibility of a new president who may adopt unsustainable policies, such as a sharp increase in public spending and an accumulation of debt at burdensome interest rates, according to Jarrín.
Moody’s Investors Service, a US firm, states that political and social risks have been recurring issues in Ecuador, but the Cross Death represents the onset of a period of “great political uncertainty.”
As a result of this heightened uncertainty, the country’s risk level has reached record highs. Following the official announcement of the Cross Death, the country risk closed at 1,865 points on May 18th, an increase of nearly 1,100 points compared to May 24, 2021, when Lasso assumed office.
All eyes are now on Correísmo, given its success in the sectional elections held on February 5, 2023. A report by the English investment bank Barclays suggests that the party of former president Rafael Correa holds an advantage in the upcoming early elections on August 20th.
Siobhan Morden, managing director of Spanish Santander Investment Securities, also believes that Correísmo will capitalize on its renewed strength at the polls.
Nevertheless, the situation remains uncertain, and Morden adds that there is an opportunity for non-traditional candidates due to the low popularity of traditional politicians.
Concerns over future debt and unrest
In the short term, there is a sense of temporary calm because the Lasso government will not have to make significant disbursements to meet external debt obligations for the remainder of 2023, states the Barclays report. The total external public debt due by the Lasso administration thru December 2023 amounts to $3.036 billion, including both principal and interest.
However, the largest debts will start expiring in 2024 and particularly in 2026. By 2026, the new government will have to pay $5.932 billion in capital and interest on external debt accumulated by previous administrations, not including any new debts incurred during their two years in office.
Another concern weighing on investors’ minds is the potential stalling of President Lasso’s economic agenda, as indicated by Moody’s. Although Lasso can govern by decree, economic decisions still require the endorsement of the Constitutional Court, which does not have a specified timeline for processing executive requests.
Additionally, any decisions made by Lasso could be met with fresh waves of social protests, similar to those witnessed in June 2022. These new mobilizations would result in business losses, ultimately hampering economic growth.
For example, the Confederation of Indigenous Nationalities (Conaie) has already cautioned President Guillermo Lasso to refrain from issuing measures that could further “incite turmoil and destabilize the country” during the remainder of his term.