Ecuador Backs Ruling Party With Market Seeing Tough Times Ahead

  • Small margin and accusations of fraud may hurt governability
  • Lingering recession, budget constraints pose stiff challenges

Ecuador’s Lenin Moreno proved that Latin America will still back left-leaning politicians after a wave of center-right leaders displaced populist governments. He’ll now have to prove he can run the oil producing economy in lean times.

With 99 percent of ballots counted, Moreno had 51 percent of the vote and a 1.4 percentage point lead over Lasso. Moreno declared himself the victor and has taken congratulatory calls from regional leaders across the ideological spectrum -- from Venezuela’s Nicolas Maduro to Peru’s Pedro Pablo Kuczynski. Meanwhile, Lasso has refused to concede defeat and plans to contest the results alleging that ballots were tampered with.

Lenin Moreno

Photographer: Rodrigo Buendia/AFP via Getty Images

Investors who had piled into Ecuador’s dollar bonds on the expectation that former banker Guillermo Lasso would win Sunday’s runoff began to dump the notes when markets opened Monday even without an official proclamation from the electoral council. A narrow victory, allegations of fraud by the opposition and protests don’t bode well for a smooth start to Moreno’s rule.

Guillermo Lasso

Photographer: Juan Ruiz/AFP via Getty Images

The prospect of clashes between political groups, with some friction in congress may make it even harder for the Andean nation and OPEC-member to implement a series of fiscal reforms needed to rein in the country’s widening deficit after 10 years of rule by self-declared socialist Rafael Correa.

"If the opposition does not recognize the legitimacy of the government, it is unlikely that Moreno will be able to forge a coalition," Torino Capital’s chief economist Francisco Rodriguez wrote in a note on Monday. "The new government may not have the political capital necessary to implement the fiscal and external adjustments necessary to put Ecuador on a sustainable policy path."

Bond investors seem to agree. Ecuador’s dollar bonds fell as much as 2.7 percent, pushing the yield on notes maturing in 2024 to 9.1 percent, the highest since December. The country’s debt as a percentage of gross domestic product reached 39.6 percent at year-end 2016, twice the level at the end of 2010, according to the Finance Ministry. The nation, which uses the U.S. dollar as its official currency, is at high risk of a funding crisis given Moreno’s plans to increase government expenditures, according to Nomura analyst Siobhan Morden.

Bumpy Road

"Moreno will try to send some positive signals to investors but shy away from needed structural reforms," Eurasia Group analyst Risa Grais-Targow wrote in a note Monday, downgrading Ecuador’s near-term trajectory to neutral from positive. "Even if he is forced to moderate, the road to more pragmatic policies will be bumpy and signals will probably be mixed."

Under Correa, the government parlayed rising revenue from oil, the OPEC member’s top export, to spend more than $350 billion on social programs, infrastructure, defense and local governments. Plunging prices for crude in 2014 and a devastating earthquake in 2015 prompted him to boost government debt to maintain spending.

Moreno is now pledging to increase public spending further, including the construction of 100,000 free or heavily subsidized housing units, a tripling of a monthly cash transfers to low-income families and the opening of 40 new technical universities.

"They’ll have to show that they are committed to reducing the structural fiscal deficit and attracting FDI as well as improving competitiveness," Morden said. "That’ll be difficult for an administration that didn’t campaign on that platform or maybe even necessarily understand what needs to be done."

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