The defeat of the correísmo brought down the country risk of Ecuador and left it 900 points below that of Argentina

Ecuadorian sovereign bonds post increases of around 15% this morning, the day after Guillermo Lasso’s surprise victory in Sunday’s presidential elections. Last year, the South American country shared part of the route taken by Argentina in terms of debt, with a successful restructuring in terms of the level of acceptance, the negotiation of a program with the Fund monetary policy (IMF) and, despite everything, the prices of sovereign bonds through the floor and unsustainable yields of sovereign bonds. But now the debt fortunes of the two countries seem to have separated: Ecuador’s country risk reduced today by around 450 points after the pro-market candidate won.

El índice Embi + de Ecuador -el riesgo país que elabora JP Morgan- todavía no arroja números de las primeras operaciones del día, luego de que los títulos emitidos por ese país en el canje del año pasado se dispararan en torno por la 15% temprano morning. However, new bond pricing specialists’ estimates take this indicator to around 719 units from the 1,169 units it closed last Friday.

The parallel with Argentina, which despite a successful restructuring and dialogue with the Fund sees its obligations at least only compatible with a very high default risk, has caught the attention of analysts and local operators, who point to the contradictory policies. with the market and investment as the backdrop for the poor performance of debt securities. Argentina’s country risk on Friday closed at 1,618 units. Until then, although at a certain distance, the Embi + of the two countries evolved in parallel.

“It wasn’t a prize, the polls showed the rival was winning. Ecuador’s debt situation had some similarities with Argentina, but now the political factor is no longer similar. Both restructured, Ecuador has a program with the IMF – not so big with Argentina – the swap had been good, but the bonds have not stopped falling, ”said Fernando Marull of FMyA.

For international investors, the outcome of an election that seemed close is a sufficient basis to explain the evolution of Ecuadorian bond prices.

“What we’re seeing today is the celebration, it’s a very relevant change. Ecuador said no to Rafael Correa and it was something that was not necessarily expected, because the populist discourse wins a lot of hearts, ”he said. Alberto Bernal, strategy director at XP Investments in New York.

“Lasso’s argument is that he’s a guy who understands the world, how finance works, why Ecuador is in a process with the IMF, understands debt sustainability and the need for investment. We’re on a topic where the market says, well, that’s someone we can talk to. Lasso is the same as (Mauricio) Macri in Argentina, ”added the operator.

Bond rates, the discount to the price at which they are traded in the market and resulting in an expected return to maturity, showed a huge slump this morning. On Friday, the Ecuadorian bond due 2030 was offering a yield of 13.65% and this morning it was at 10.18%. Unless the risk of default is perceived by the market, bond prices rise and yields fall. If, by hypothesis, Ecuador wanted to issue a bond today, it would have to pay much less rate than last Friday.

“The challenge for the Lasso government will be to find a balance between an IMF program that is realistic under a weak political coalition. We assume an initial reaction to bond yields of 10% to 10.5% through 2040, but the exit yields of 9% could be revised after the restructuring in early September of last year, when there was a last optimism for the continuity of pro-market policies and strong multilateral support. There is no silver bullet under Lasso’s weak tenure, with a phased process to tackle structural reforms (labor and tax reforms) that increase the trend of economic growth, while reducing large public payrolls and guaranteeing significant gross financing needs. The challenge will be to get coherent funding only on gradual fiscal adjustment and only on gradual cyclical growth in strategic sectors, ”he wrote. Siobhan morden of Amherst Pierpoint Securities.

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