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Truce in Ecuador will not end problems in the bond market

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Even after President Guillermo Lasso survived an impeachment attempt last week, investors remain concerned that the former banker will not last until his term ends in 2025, triggering another debt crisis. His nerves are understandable. Ecuador has defaulted 11 times in less than 200 years of independence, the last one being just two years ago.

While the nation’s sovereign bonds pared some losses last week after the government reached an agreement with representatives of indigenous organizations to end more than two weeks of nationwide protests over fuel prices and high cost of living, values ​​remain well below the 64 cents they were trading at before the riots. And they are unlikely to reach that level again any time soon, according to investors and analysts.

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The concern is whether Lasso will finish his termsaid Zulfi Ali, senior portfolio manager at PGIM Fixed Income focused on Latin America, in Newark. “And if he doesn’t finish his term, then there will be new elections, and new elections could throw up a whole new group of candidates, and we don’t know what his program will be.”

Last month’s protests brought back memories of the 2019 social unrest that forced then-president Lenín Moreno to move his government to the coastal city of Guayaquil and paved the way for the 2020 default. His fate was nothing exceptional for Ecuador. From 1997 to 2006, no elected president completed a four-year term.

The past weighs heavily on them” in Ecuador, said Alejandro Arreaza, an economist at Barclays in New York. “The bad thing is that, if they fail to break with these perceptions, crises become a self-fulfilling prophecy”.

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Ecuador’s bonds remain well below levels seen before the start of the protests.

Last month, Ecuador’s bonds were the worst performers in emerging markets after those of Lebanon, which has not paid its creditors in more than two years, and those of war-torn Ukraine, which is reportedly exploring options. of restructuring.

The debt plummeted 21% after protests cut oil production, the former OPEC member’s main export. That compares with a 6.3% drop in a Bloomberg index of developing-world sovereign bonds.

Political instability will likely prevent Ecuador from reaping the full benefits of high oil prices as the government ramps up social spending, analysts Fernando Losada, Omar Zeolla and Thomas Jackson of Oppenheimer & Co. Inc. wrote in a research report. published on June 30.

To end the protests, the government agreed to increase subsidies by more than 10% to $3.4 billion. As a result, Ecuador will likely have to renegotiate targets with the International Monetary Fund before an expected final disbursement this year.

In addition to these changes in economic policy, the Minister of Economy and Finance, Simón Cueva, who managed the relationship with the IMF and was a critic of fuel subsidies, will be replaced. His successor will be announced later Tuesday amid a broader cabinet reshuffle.

Unfortunately, the country ended up in the eye of the hurricane.” said Joe Delvaux, manager of emerging markets distressed debt portfolios at Amundi in London. “This just adds uncertainty.”

Source: Gestion

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