(Bloomberg) — The overwhelming support Ecuador’s president enjoyed is evaporating just a few months ahead of the country’s next election — and with it, the prospects for the nation’s bonds.
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Daniel Noboa quickly became a market darling by raising taxes and cutting subsidies after he rose to power a year ago. Under his watch, Ecuador’s debt delivered investors returns of more than 68%, trailing only Argentina among emerging markets. The risk premium traders demand to hold the notes over Treasuries fell by almost half, according to JPMorgan & Chase data.
But his support has slumped amid a series of setbacks, including crippling blackouts that have eroded economic growth. Opinion polls show the 36-year-old heir to a banana fortune is now running neck-and-neck with a left-wing candidate ahead of the first round of voting in February. The surveys raised concern of another policy shift in the country, which last defaulted in 2020 and has $900 million in payments coming due in 2026.
“The catastrophic scenario is that a hard left candidate wins,” said Guillermo Guerrero, head of research at EMFI Group Limited, who downgraded Ecuador’s debt to neutral from overweight in November. “No one will pay attention to anything other than the election through April.”
Noboa was elected last year to serve out the last 18 months of his predecessor’s term. He has to take leave from the presidency in January to run for re-election. If no candidate wins outright in a first-round vote, a runoff takes place in April.
Markets have already begun paring back. After a stellar start to the year, Ecuador’s bonds have delivered some of the worst returns in emerging-markets this quarter, down more than 3.6% versus an average loss of 0.6% for developing nation government debt. Dollar notes due 2035 are trading at 54.4 cents on the dollar, while yields are hovering around 15%.
In some ways, history is repeating itself.
Former President Guillermo Lasso also raised hopes among investors when he came to power in May 2021, only to see his popularity quickly fade and his reformist agenda stall. It was his decision to close congress that triggered early elections that opened the door to Noboa.
In the past few years, a series of prison riots left hundreds dead and triggered global headlines for a nation that was previously seen as largely insulated from the drug cartel violence that plagues Latin America. Fernando Villavicencio, a journalist known for his crusade against corruption who was a serious contender in the election, was assassinated less than two weeks before the vote.
After scraping past the left-leaning candidate Luisa Gonzalez, Noboa quickly declared war on the drug cartels, labeling them as terrorist organizations, and saw his popularity soar. He invested that political capital in key fiscal reforms, including an increase in the value-added-tax and a gradual removal of subsidies on low-octane gasoline.
That was essential to unlock pledges of up to $14 billion in loans from the International Monetary Fund and other multilateral lenders over the next four years.
Prospects of a bond buyback in the coming weeks through the nation’s second debt-for-nature swap have also helped prop up the notes. In such transactions, the country typically sells new debt at a lower interest rate with guarantees from multilateral institutions, channeling the funds to environmental conservation projects.
Blackouts
But Noboa’s heady days of popularity are now seemingly over following two months of nationwide blackouts lasting as long as 14 hours a day, and yet another year of near stagnation in the economy.
The latest poll by Comunicaliza released on Nov. 15 showed his support at just 28.9%, a statistical tie with his previous adversary Gonzalez. That compares with 59% in May, and 80% back in January.
The government didn’t respond to a request for comment on Noboa’s popularity or bond performance.
Though investors largely see Noboa winning a second term, the mere chance he loses to Gonzalez — the protege of former president Rafael Correa who governed Ecuador for a decade and oversaw an combative debt default in 2008 — is enough for traders to panic.
“The probability of default increases in a Correista administration,” said Nathalie Marshik, a sovereign strategist at HSBC in New York. “The market is very concerned about polls.”
And it’s not just about Noboa. His decline in the polls also hurt the chances of his party winning a majority in congress to back his agenda, including plans to fix the electricity shortages, should he win a second term.
“In the short run, people are going to care about whether Noboa wins the election or not,” said Jared Lou, a portfolio manager at William Blair in New York. “Then there’s this open question on how do you actually solve the problems that need to be solved?”
–With assistance from Travis Waldron.
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