Quick Take: Why Ecuador's runoff
Sunday's election is important
Guillermo Lasso y Andrés Arauz
- Lasso says he'll strengthen investor confidence
Andres Arauz has pledged to continue open-pit mining
By Stephan Kueffner/Bloomberg
Petroleumworld 04 08 2021
Voters in Ecuador face a stark choice when they pick their new president in the April 11 runoff election. They can go with a conservative candidate promising free trade with the U.S. who says he can heal the wounds of a decade and a half of confrontational politics. Or they can choose the freewheeling spending and heavy government involvement in the economy pledged by the proxy of a popular and populist leader who knocked on China's doors for loans. The election will be watched beyond Ecuador's borders, including by bond investors.
1. Who are the candidates?
Guillermo Lasso, 65, is a career banker from the coastal hub Guayaquil. He was the favored candidate of conservatives earlier in the campaign and, since the first-round vote on Feb. 7, he has won endorsements from politicians across the political spectrum. Left-wing economist Andres Arauz, 36, is the protege of former President Rafael Correa, a still-popular socialist in exile in Belgium, having been convicted in absentia for graft. While Arauz won the first round by 13 percentage points, putting him clearly ahead in the race, recent polls suggest a close fight for the runoff. Still, in the first round polls diverged significantly from the results, adding uncertainty to Sunday's vote.
2. What do the candidates promise?
Lasso says he'll strengthen investor confidence, cut red tape and increase private-sector hiring. He promises to raise the minimum wage to $500 a month and to fix a public health care system hit hard by Covid-19, picking a doctor as his running mate. In an appeal to younger voters, he pledged to open-pit mining, a controversial environmental issue, to voters and to strengthen the rights of women and sexual minorities. Arauz promises to kickstart growth by distributing $1,000 each to 1 million needy families from central bank reserves in his first week as president, to provide $3 billion to local governments and to revive infrastructure programs carried out by his mentor. He also wants judges to review the case against Correa and allow him to return from exile.
3. What's the issue for markets?
Ecuador is notorious in the bond market as a serial defaulter , having restructured $17.4 billion in debt just last year and owing $45.4 billion in total foreign debt. (Ecuador uses the U.S. dollar.) Investors will be on alert for signs that the next government will honor the terms of that agreement . The new administration will also be judged on how it maintains austerity measures required under a deal inked in September with the International Monetary Fund. Arauz's pledge to raid central bank reserves for the $1 billion stimulus payment would break the terms of the IMF deal that could cause a selloff in the new bonds and further threaten the nation's debt sustainability. A victory by Lasso, in the view of one strategist, would trigger a rally and bring the nation back to international debt markets by 2022.
4. Has the IMF deal stabilized the economy?
The IMF front-loaded $4 billion in the $6.5 billion rescue package in the second half of 2020, representing approximately 4% of the country's annual gross domestic product. This influx of money allowed the administration of President Lenin Moreno to largely stay current with civil servants and pay off some debts to government contractors, in turn allowing them to pay salaries and debts. Ecuador's economy shrank 7.8% in 2020, according to the central bank, even with the IMF's help.
5. What's the backdrop to all this?
From his exile in Belgium, Correa played a key role in picking Arauz, a relative political unknown, to carry on his legacy. Correa featured prominently in ads and on posters until they were banned by the National Electoral Council on the grounds that his conviction had stripped him of the right to campaign. He remained heavily involved during the campaign through social networks and interviews with local media. During Correa's polarizing presidency, from 2007 to 2017, Ecuador's relations with the U.S. soured as he aligned the country with Cuba, Venezuela and Iran. China became a crucial lender, providing billions for infrastructure built by Chinese companies. Since 2017, under Moreno, Ecuador restored ties to the U.S. , and in the last days of Donald Trump's presidency, the U.S. International Development Finance Corp. struck a deal to help Ecuador repay billions of dollars owed to China. Lasso would keep Ecuador aligned with Western democracies.