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Analysis | How Ecuador’s President’s Constitutional Game Failed


Ecuador, one of the few countries in South America to have a conservative leader, saw its politics thrown into disarray in early February when President Guillermo Lasso received a double rebuke from voters. A package of constitutional amendments he proposed was voted down, to the surprise of pollsters and investors, and the left-wing opposition put on a strong showing for mayoral races in key cities. The country’s bonds collapsed on the possibility that the market-friendly Lasso would not be able to complete the remaining two years of his tenure.

1. What did Lasso suggest?

The main referendum proposal was to allow the extradition of organized crime leaders to the US. This was an attempt by Lasso to bolster his popularity, which had suffered from an increase in drug-related violence. Other amendments related to safety, the environment and a plan to reduce the size of the National Assembly.

2. What were the results?

With more than 98% of the vote, all eight constitutional amendments proposed by Lasso’s government failed, including the most important extradition reform. On the same ballot, former President Rafael Correa’s party won victories in most of the major municipal races, including in Quito’s capital. His Citizen Revolution party also won the mayoralty of Guayaquil, one of the country’s most important cities — a city that had been the stronghold of Lasso’s Social Christian Party for thirty years.

3. Why were the amendments rejected?

That puzzles analysts, as pre-election polls by pollsters Ipsos and Cetadatos had shown the majority of Ecuadorians supported all eight proposals. One line of thought is that voters chose to reject constitutional reform solely to protest Lasso’s government. The referendum “turned into an apparent plebiscite” on Lasso’s government, according to Barclays Plc. economist Alejandro Arreaza.

4. What was the response?

The outcome surprised most politicians and investors. As the results trickled in, the country’s bonds plummeted, with notes due 2030 falling 10 cents on February 6, the largest one-day drop ever recorded. Wall Street analysts argued that the rejection of Lasso’s proposals weakens his short-term mandate, while Citizen Revolution’s strong showing clouds the country’s long-term financial prospects.

5. Why might this bring Lasso down?

The results reinforce the country’s current political paralysis and reliance on high oil prices, said Siobhan Morden, a seasoned sovereign debt strategist who has specialized in emerging market debt for the past three decades. The opposition-controlled National Assembly has already opened a corruption investigation against Lasso. That could be used as a means of incriminating him, though that’s still considered unlikely. Lawmakers failed to secure the support of a two-thirds majority needed to remove Lasso from office in 2022. Lasso’s term is expected to expire in 2025, but investors say his term will be weaker going forward. That could leave him unable to implement the economic reforms they deem necessary to promote long-term growth in the South American country.

6. Who are the alternatives?

Lasso said he plans to seek re-election, and Indigenous leader Leonidas Iza is expected to take to the streets in the coming weeks or months to take advantage of Lasso’s weakness and raise his national profile, Eurasia Group analysts Risa Grais- Targow and Yael Sternberg wrote. Former president Correa is in exile in Belgium.

7. Why are investors so wary of political instability in Ecuador?

Even as international reserves reach record highs, debt payments are minimal for years to come, and the budget deficit has narrowed under the Lasso administration, asset managers quickly flee as political uncertainty creeps into Ecuador. Since its independence 200 years ago, the country has defaulted on its foreign debt 11 times, most recently at the outbreak of the coronavirus pandemic. Minimal instability in the country could dethrone one of the few market-friendly governments in the region, putting the reins in the hands of the opposition, a hard sell for investors with fresh memories of Correa’s 2008 indebtedness.

More stories like this are available at bloomberg.com

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