Ecuador’s Election of a Pro-Business President Sends Bonds Rallying

Ecuadorean bonds posted modest gains after investor-favorite Daniel Noboa, a 35-year-old business leader from a wealthy banana exporting family, won the presidential election after pledging to restore order to a nation torn by violence.

(Bloomberg) — Ecuadorean bonds posted modest gains after investor-favorite Daniel Noboa, a 35-year-old business leader from a wealthy banana exporting family, won the presidential election after pledging to restore order to a nation torn by violence. 

Notes due in 2035 pared gains after jumping as much as 2.9 cents on the dollar Monday to the highest in about a month. Investors were relieved at the defeat of Luisa Gonzalez, an ally of former President Rafael Correa, the leftist leader who governed Ecuador for a decade and oversaw a debt default in 2008. The nation’s bonds had fallen about 20% since the beginning of the year through last week.

Noboa beat his socialist opponent Gonzalez 52% to 48% in a runoff with more than 97% of votes tallied, according to preliminary data from the electoral authority. Gonzalez conceded. 

While the result should give the distressed bonds an initial boost, there are risks ahead.

Noboa, elected for a caretaker government after the previous president called a new vote, has a year and a half to get a grip on a country besieged by powerful cocaine cartels, struggling to service its debt, and beset by instability in congress that has made it difficult to pass laws or raise taxes. He will hold office from December until 2025, although he can run for reelection.

“In the short-term and institutionally Noboa is better than the Correismo alternative,” Ricardo Penfold, managing director at Seaport Global Holdings wrote in a note Monday. “However, from a bond price perspective, there is no guarantee that with re-election looming in 2025, Noboa wants to push forward fiscal consolidation reforms needed for a sustained market rally.”

US-educated Noboa, who becomes one of the world’s youngest leaders, wants to make the country more open to foreign investment, and to use tax breaks to boost job creation. Before the vote, many analysts predicted that a Noboa win would spark a bond rally. 

“We’ll start working to rebuild a country that has been gravely hit by violence, by corruption and by hatred,” he said in a short victory speech from a oceanside beach hut.

Soldiers kept guard outside Noboa’s mansion in the Pacific Coast village of Olon on Sunday night, while plain clothes security guards patrolled the manicured lawns.

Ruling Coalition

Some of Noboa’s biggest headaches are likely to come from congress, where only about 10% of lawmakers back his party and where Correa’s Citizen Revolution party will hold the largest number of seats. The lack of a ruling coalition made it very difficult for the current government of President Guillermo Lasso to get legislation passed. 

“The composition of the National Assembly is worrying, as Noboa could face the same challenge that Lasso did,” said political scientist Simon Pachano from FLACSO university in Quito. 

At the same time, the second straight defeat for Correa’s movement in its quest to retake power should “provide a boost of optimism,” said Siobhan Morden, head of Latin America Fixed Income Strategy at Banco Santander SA. 

“The attention will quickly shift to the economic team, the economic plan, and the political pact for a workable legislative coalition,” Morden wrote in a report published Oct. 13. 

The nation’s bonds due 2035 are trading around 38 cents on the dollar, according to indicative pricing collected by Bloomberg, implying that traders see a high likelihood of a default even as the country’s next big bond payment isn’t until 2026.

Read more: Investors Look for Ecuador Election to Bring End to Bond Rout

For the rally to be sustainable, Noboa has to quickly announce an orthodox economic team, according to Nathalie Marshik, a managing director for fixed income at BNP Paribas in New York. 

“He needs to start building some alliance in Congress and put forward an agenda of priorities that makes sense for the 18 months or so he has in power,” she said. 

Oil Drilling

Despite his image as a free marketeer, Noboa endorsed a recent referendum to curtail oil drilling in the Amazon, arguing that it wouldn’t generate enough profits to justify the environmental damage. He also spooked investors when he proposed to raid the central bank’s reserves to fund spending, though he later backtracked. 

The election was triggered when Lasso dissolved congress to avoid impeachment. Because of this, Noboa will only serve until May 2025, when Lasso’s term would have ended. 

Noboa’s fresh public face and lack of political experience resonated with the electorate in the country of 17 million people, as voters tired of the left-right polarization that dominated the aftermath of the Correa years looked for novel alternatives.

He will be the youngest leader in the Americas, being 36 years old at the time of his inauguration, the same age as Chile’s Gabriel Boric when he became president last year. Like Boric, Noboa will have to overcome his inexperience in government to revive growth and to negotiate with a congress he doesn’t control.

Noboa’s triumph also means a pro-business government remains in power in Ecuador despite Lasso’s poor approval ratings at a time the region appears to be moving away from the leftist wave that dominated post-pandemic elections. Argentina picks a president next week, with libertarian outsider Javier Milei appearing to be the frontrunner.

Father’s Company 

After finishing his education in the US, Noboa spent his early years working for his father’s company. In the first half of 2023, the business exported more than 8 million boxes of bananas, according to trade association data. 

They also own fertilizer, chocolate, transportation and plastics companies, among other interests. Noboa’s father Alvaro, one of Ecuador’s richest persons, ran unsuccessfully for president five times.

In 2021, Daniel Noboa won a seat in congress, and became president of the congressional Economic Development Committee, which drafted legislation on sectors such as fintech and small business.

Noboa vaulted from sixth to second place after the startling assassination of fellow candidate Fernando Villavicencio in August. The nation was even more shocked when seven men accused of being involved in the plot were massacred in prison.

Read more: Ecuador Presidential Hopeful Wants Violent Prisoners Put to Sea 

In a campaign where the insecurity crisis dominated voters’ concerns, Noboa has pledged to tame the cocaine cartels that have made Ecuador one of the world’s most violent countries in recent years. Among other initiatives, he says he’ll move the most dangerous gang bosses to prisons floating off Ecuador’s Pacific coast.

(Updates first two paragraphs to reflect market move and adds BNP analyst comments in 14th and 15th paragraphs)

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