Ecuador bonds roiled by undecided presidential race runoff | Reuters

A surprise strong showing by indigenous anti-mining activist Yaku Perez in Ecuador’s presidential elections race continued to roil the country’s sovereign bonds and rattled investors trying to gauge the progressive candidate’s possible policy shifts.

Leftist Andres Arauz won the first round as mostly expected, but it may not be clear for days whom he will face on April 11. It could be Perez or center-right perennial candidate Guillermo Lasso.

“It’s an interesting dilemma for foreign investors,” said Roger Horn, senior emerging market strategist at SMBC Nikko Securities, about market expectations for who will face Arauz.

“The instinct is to want to see the conservative, business-friendly Lasso win, but that would place him against Arauz who is probably a lot more popular – or at least his movement is.”

The 2030, 0.5% coupon bond fell 1.5 cents on Tuesday to 42.43 from above 45 going into the election and the 2040 was down 2.5 cents at 42.45.

Ecuador investors have been no strangers to roller-coaster bond moves. A few weeks ago, Arauz declared he wanted to tear up a program the outgoing government negotiated with the International Monetary Fund, sending shivers through markets.

But in recent days Arauz sought to soothe investors’ frayed nerves, confirming his commitment to the IMF deal. Now investors are bracing for another unknown.

“(Perez) has come out with some strong comments about re-opening the debt exchange, about the mining sector, the oil sector,” said Kevin Daly at Aberdeen Standard Investments.

“He is potentially in some ways pretty negative for the country in terms of his views.”

Nathalie Marshik at Stifel pointed to Perez wanting to renegotiate domestic as well as external debt.

“Perez has refused to meet with the IMF so far and called for an audit of public accounts,” she said.

Ecuador renegotiated over $17 billion with private creditors last year and its schedule of private payments is relatively favorable throughout the next president’s term.

Analysts at JPMorgan said they expected Perez “could be inclined to seek a deeper program renegotiation” with the IMF and that his stance toward debt owed to China or the IMF, as well as debt taken on by the current administration, “will likely overshadow the market’s thinking on Perez until they are clarified.”

The recently restructured Ecuador bonds traded near distressed levels earlier this month and bounced back ahead of the election mostly on an expected Arauz-Lasso runoff outcome.

“The outlook still remains binary and dependent upon whether a fragmented political alliance can execute difficult economic reform or conversely succumb into broader crisis of de-dollarization,” said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities in New York in a client note. Reporting by Rodrigo Campos in New York Additional reporting by Karin Strohecker in London Editing by Matthew Lewis

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