Bloomberg — Ecuador bonds surged as the country headed toward a runoff in October that’s seen as more likely to usher in a market-friendly president.
The nation’s dollar securities are the top gainers across emerging markets, with the notes due 2035 rising as much as 3.5 cents to 40.8 cents on the dollar, the highest since February, before paring gains. The 2040 and 2030 securities also jumped, erasing losses from early London trading, according to indicative pricing data collected by Bloomberg.
Entrepreneur Daniel Noboa will face socialist candidate Luisa Gonzalez in a second-round vote on Oct. 15. While Gonzalez, an ally of former President Rafael Correa, led a field of eight candidates with two-thirds of ballots counted, Noboa had more than 24% and now becomes the favorite to win since backers of other candidates are more likely to choose him over Gonzalez.
“‘Anyone other than Correismo’ should have the advantage in the second round,” Siobhan Morden, managing director for Latin America fixed income at Santander wrote in a note Monday.
The move in the bonds extends an unexpected rally that began after a presidential candidate was shot dead this month. Traders were betting a surge in violent crime — including a string of political killings — would hinder Gonzalez’s support.
Sunday’s snap election came after President Guillermo Lasso dissolved congress in May as lawmakers prepared to impeach him. Political uncertainty in the country, which has defaulted on its debt 11 times since independence, has rattled investors this year.
The nation’s bonds have handed investors losses of around 19% this year, the worst in emerging markets, according to a Bloomberg index.
“The election results might not be conclusive, but in our view they significantly improve the balance of risks,” according to Alejandro Arreaza, an economist at Barclays in New York. “Governability and economic challenges might persist, but at least concerns over the willingness to meet its debt obligations could decline significantly.”
Money managers expect whoever wins the presidency to stave off default in the 18 months they will be in office — the remainder of Lasso’s term. The next large payments on the country’s $15.5 billion of sovereign bonds come due in 2025, the same year the next election will be held.
Correa’s Citizen Revolution Movement secured 39% of seats in the new congress, making it the largest minority in the assembly, according to preliminary results. If Noboa wins the runoff, he could face a political gridlock similar to Lasso’s, who also faced an opposition-led congress.
Ecuadorians also approved a referendum that will hinder crude production and exploration and could lead to a 12% drop in the country’s oil output, Fitch Ratings estimates.
“With bonds still at very depressed levels, they may see some near-term support yet all the medium-term challenges persist meaning we don’t see a path to a sustained rise in prices,” Simon Waever, global head of emerging-market sovereign credit strategy at Morgan Stanley wrote in a note Monday.
--With assistance from Philip Sanders.
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