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Featuring: coronavirus impact | ecuador 

This week we discuss the likely fallout for the global economy from the coronavirus epidemic and another episode of miscommunication with markets by Ecuador’s government.

Worldwide spread of coronavirus epidemic challenges the global growth outlook and focuses attention on the policy response 

Market Event: Risk-off sentiment ensued this week on the back of the reality that the COVID-19 virus is swiftly spreading worldwide and that the global economy is facing a significant challenge from economic activity being disrupted across the globe. China, the source of the outbreak, has responded thus far with monetary action including RRR cuts and targeted lending, as well as fiscal support in the form of targeted tax reductions, social security contribution waivers, and front loaded local government bond quotas. Meanwhile, Hong Kong announced a stimulus package totaling 3% of GDP composed of cash handouts and reductions in salary and profit taxes. Additionally, there are early signs of a potential fiscal response to offset the impact of the virus in Europe, most importantly with Germany considering a softening in its debt brake.

Gramercy View: The impact on global growth will increase as the virus spreads, likely pushing the rate to around 2.5% this year and remains subject to downside risks, in our view, despite the stimulus response. The deceleration will likely be driven by a combination of supply chain disruptions, softened consumer sentiment, reduced tourism and travel, and prolonged by lagged knowledge and realization of the spread of the virus. Stimulus should help to offset some of the pressure on activity and spur eventual recovery, but there are limitations on the effect of monetary support given the nature of this shock to the system (economic vs. financial). Early signs of fiscal measures are promising but fall short at the moment to shore up growth to previously expected levels. Political headwinds also remain. Open economies that are heavily reliant on external demand are the most immediately vulnerable, while countries with weak and inadequate healthcare systems, many in Africa, face ample risk in the event of domestic outbreaks. With all this being said, the virus’s impact should still ultimately be transitory in nature, despite its deeper and more prolonged impact. A possible longer-term risk is associated with the U.S. response and growth implications of a more meaningful outbreak domestically, given the influence it could have on political outcomes.

Ecuador mismanages communication with investors as the country drifts toward a difficult election season 

Market Events: Comments by Ecuador’s finance minister, Richard Martinez, attempting to highlight the success of the 2019 liability management operation that helped reduce this year’s external debt amortizations were interpreted by investors as a signal that Ecuador might be mulling a possible re-profiling of international debt, which led to an abrupt and sharp sell-off in the sovereign bonds. Although the apparent misunderstanding was swiftly addressed by the authorities, and bond prices recovered most of the lost ground, it marks yet another episode of less than ideal communication with markets against a deteriorating global backdrop due to the coronavirus epidemic and a very difficult election season around the corner.

Gramercy View: Ecuador’s sovereign curve has already been under material pressure in recent weeks due to a combination of investors’ lack of enthusiasm about the ability of the Moreno Administration to move forward with a couple of important, but politically difficult, reform initiatives and a global environment that has quickly turned significantly less benign for riskier credits such as Ecuador. The overall risk-off sentiment around Ecuador is being augmented by the collapse of oil prices due to the impact of the coronavirus epidemic on global economic activity and outlook, especially given the country’s high reliance on its oil sector for exports and fiscal revenues. This being said, our main concern is actually the forthcoming election season: presidential elections will take place in early 2021 and promise to be very noisy and polarizing. In the meantime, the political window for implementing much needed reforms to increase the competitiveness of Ecuador’s dollarized economy is quickly closing as the elections get closer. Critically from a market point of view, former president, Rafael Correa, so far has not been disqualified from being a candidate due to the ongoing legal procedures against him. In fact, he remains the most popular political figure in Ecuador. Even if Correa’s path toward participating does not get cleared on time for the 2021 elections, a proxy candidate endorsed by him will certainly be highly competitive and stands an excellent chance to reach the second round runoff of the presidential elections. This is a political risk scenario that will keep investors nervous during the upcoming election season, especially as the country will also be nearing the end of its current IMF program.

Please contact our Co-Heads of Sovereign Research with any questions:

Kathryn Exum, Senior Vice President, Sovereign Research Analyst
[email protected]

Petar Atanasov, Senior Vice President, Sovereign Research Analyst
[email protected]

This document is for informational purposes only. The information presented is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Gramercy may have current investment positions in the securities or sovereigns mentioned above. The information and opinions contained in this paper are as of the date of initial publication, derived from proprietary and nonproprietary sources deemed by Gramercy to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. This paper may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader. You should not rely on this presentation as the basis upon which to make an investment decision. Investment involves risk. There can be no assurance that investment objectives will be achieved. Investors must be prepared to bear the risk of a total loss of their investment. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. The information provided herein is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation.