(Bloomberg) — The best recovery in emerging markets this year hinges on the popularity of one person: Daniel Noboa, the 36-year-old heir to a banana fortune.
Less than six months after taking over as president of Ecuador, Noboa has cracked down on gang violence, raised taxes and made progress in negotiating a deal with the International Monetary Fund – all of which makes the country’s dollar bonds the most efficient among developing countries.
The millennial leader will face a crucial test on Sunday when Ecuadorians vote on the security measures he proposed to continue the fight against organized crime in a country gripped by a spiral of violence.
For investors, the vote results are key to determining Noboa’s popularity and whether Ecuador’s sovereign debt can extend its recovery or repeat the crash seen last year after the former president’s referendum failed. Guillermo Lasso.
“President Noboa’s success in the upcoming referendum on April 21 will be crucial to passing reforms, as well as gaining greater representation in the National Assembly,” said Ricardo Penfold, managing director of Seaport Global in New York.
In addition to increased use of the military, Noboa is seeking approval for the extradition of Ecuadorian citizens to combat crime and repeal constitutional bans on temporary labor and international arbitration. But the vote comes amid an energy crisis, with the president ordering businesses and government offices to close on Thursday and Friday due to a crippling lack of electricity that he blamed on drought but also on sabotage presumed.
However, compared to Lasso, who had an approval rating of 13.5% at the time of his referendum, Noboa, with a rating of 66.8% as of April 12, goes to the vote in a much stronger position, according to Communication.
“What we learned from the Lasso referendum fiasco last year is that Ecuadorian voters tend not to really care or read the questions,” said Risa Grais-Targow, an analyst at Eurasia Group, which sees greater upside potential on bonds if the referendum results are favorable. “It all depends on what they think of the president.”
Holders of Ecuador’s debt have experienced ups and downs over the past two years. Sovereign notes were among the worst performers in 2023, as Ecuador faced impeachment demands, the assassination of a presidential candidate and a sharp escalation in narco-gang violence.
Since then, bonds have risen to the top of emerging markets, as Noboa exploited the security crisis to advance reforms, winning favor with global investors and acceptance among Ecuadorians.
The additional yield investors demand for holding Ecuadorian dollar bonds has fallen more than nine percentage points this year to 1,141 basis points, according to JPMorgan Chase data. The risk premium has returned to February 2023 levels, just before Lasso’s referendum defeat led to a collapse in the country’s sovereign debt.
“Noboa’s security strategy provides it with unprecedented governability and political support,” Grais-Targow said. She added that the young leader “has better prospects for political stability than I have seen” since the administration of former President Rafael Correa from 2007 to 2017, who leads the Citizens’ Revolution party and is in self-imposed exile due to corruption. conviction.
Chris Preece, portfolio manager at Pictet Asset Management, said the market expects the referendum to be successful given Noboa’s successes so far.
“Noboa has exceptionally high poll numbers. He is very popular. It has not been able to completely quell the violence, but the situation has improved significantly,” said Preece, who holds an overweight position in bonds.
Ecuadorian bonds have returned more than 60% to investors this year, compared with an average of 0.1% for emerging market sovereign bonds, according to data compiled by Bloomberg.
With budgetary measures and negotiations with the IMF largely integrated, a favorable outcome on Sunday would be a “powerful sign” of popular support for Noboa ahead of the 2025 elections and would thus generate further gains, according to strategists at BancTrust & Co. Juan Sola and Agustín Costa. and Ramiro Blazquez. They expect the bond spread to compress further to 200 basis points.
Investors like Polina Kurdyavko, head of emerging debt at BlueBay Asset Management, are waiting for the results to decide whether to bet on Ecuador.
“It is very difficult to make projections in Ecuador beyond a 3, 4 or 5 month horizon,” Kurdyavko said. “For now, we have decided to stand on the sidelines and see how the referendum develops and whether the sustainability of the policy can be ensured.”
–With help from Stephan Kueffner.
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