Ecuadorean bonds rally as Guillermo Lasso wins presidential election

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Ecuadorean bonds rally as Guillermo Lasso wins presidential election

- Ecuadorean bonds rallied after Career Banker Guillermo Lasso won the presidential election with a late surge of support, calming investors who thought his opponent was likely to lead the country into insolvency once again.

Lasso beat the economist Rafael Correa, a left-wing protege of former president Andres Arauz, by a solid margin in Sunday's runoff vote. Arauz, who conceded defeat, won the first round of February 13 percentage points.

It was a huge relief for bondholders, who had reduced the country's benchmark notes to their biggest gain since they were restructured just eight months ago. Ecuadorean debt had been trading at levels that signaled broad investor skepticism amid the worry that a victory for Arauz would lead to unsustainable levels of social spending and an inevitable default from a politician who promised to prioritize the poor over the powerful.

Lasso, a 65-year-old self-made millionaire and father of five, was seen as largely representing the establishment, having vowed to keep up a$ 6.5 billion financing agreement with the International Monetary Fund and to maintain payments on the nation's overseas bonds. Lasso said in his victory speech Sunday evening that he will work to create prosperity we all long for.

He received international congratulations from Latin American Presidents and IMF Managing Director Kristalina Georgieva who said that the IMF is committed to help Ecuador cope with the pandemic, build a better future for all its people via Twitter.

Lasso's victory should reduce political uncertainty and increase the prospects of a reasonably neutral macro policy agenda, wrote Goldman Sachs Group Inc. analyst Tiago Severo in a note.

Lasso, Stifel Nicolaus Co. and TPCG Valores were also among the firms to raise their interest in Ecuador's bonds in the wake of Morgan Stanley's victory, betting that gains would extend beyond today's rally.

The US dollar's$ 3.7 billion bonds due in 2030 surged almost 15 cents to 74 cents on the dollar, by far the biggest price jump since they were restructured.

Peru's southern neighbor Ecuador also held presidential elections Sunday, with exit polls suggesting a messy runoff after no candidate came near the threshold needed for a first round win. Lasso had 58.5 overseas bonds; with some 99% of votes counted in Ecuador, the down to 48.5% for Ecuador.

Why Ecuador's Runoff vote matters in the bond market: QuickTake The campaign for control of Ecuador, an oil exporter and world-leading producer of bananas, shrimp and balsa wood, which is crucial for wind turbine rotors, has implications beyond borders.

Arauz, 36, who pledged to use the central bank reserves to pay poor families, had been expected to strengthen ties with left-leaning governments in the region, including in Cuba, Mexico, Venezuela and Argentina.

Lasso's victory represents more of a focus on ties with Washington, and with U.S.-supported governments in countries like Chile, Colombia and Brazil.

While bond investors breathed a sigh of relief, Lasso wo n't have an easy time running the country of 17 million people amid a sluggish vaccination campaign. The dollarized economy contracted 7.8% as the pandemic was deteriorating activity, its worst performance since at least the 1970 s. Lasso will have to establish a working relationship with the National Assembly, where his backers only hold 31 of the 137 seats in the system.

He also has to reach out to the more than 1.8 million Ecuadorians who have destroyed their votes, including many from indigenous movements. According to Maria Jose Calderon, political scientist at the Pontifical Catholic University in Quito, Lasso will find it difficult to implement other economic policies since legislators from other parties will be reluctant to spend their political capital on his behalf.

The president-elect has said that he 'll implement policies that promote investment and job creation in the private sector and to phase out a tax on borrowing money out of the country. He has also promised to increase the monthly minimum wage to$ 500 from$ 400 and oversee the vaccination of 9 million people against Covid 19 during his first 100 days of office.

Even if Lasso encounters challenges in implementing his political agenda, it will be easier for him and the IMF to negotiate middle ground as they negotiate timelines for austerity measures, according to Nathalie Marshik, head of emerging market sovereign research at Stifel Nicolaus Co. in New York.

During the campaign, Lasso rejected increasing taxes to meet the IMF cuts targets even though Ecuador has one of the lowest value-added taxes in the region at 12%. Recent gains in crude oil, the country's biggest export, as well as the close to$ 1 billion that the country can expect to gain from the IMF's planned increase in special drawing rights will give him previously unplanned fiscal breathing room.

This could offer the new government some room to postpone some of the planned measures or design an easier-to-do version of tax reform, said Barclays analyst Alejandro Arreaza in a research note.

Ecuador could even be tempted to return to the financial market sooner than planned under the IMF deal if yields fall too low, added Arreaza. If you would like more articles like this, please visit bloomberg.com.

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