Ecuador bonds drop as financial markets worry about Noboa’s plan to tap international reserves

Sep 14, 2023 | 0 comments

By Stephan Kueffner

Ecuador bonds led losses in emerging markets after the frontrunner in next month’s presidential election floated a plan to tap foreign reserves to combat the impact of the El Niño weather pattern.

Daniel Noboa

Daniel Noboa, a centrist who is leading in polls, said he wanted to channel about $1.5 billion in foreign reserves to help offset the damage to agricultural exports.

“These are extreme conditions,” he said in an interview Monday with Radio KCH in Guayaquil.

The nation’s global bonds were the worst performers in an index of emerging-market debt Tuesday, with notes due in 2035 slumping about 1.4 cents on the dollar, according to indicative pricing compiled by Bloomberg. Noboa’s comments raised alarms for traders who had come to see him as more fiscally prudent than his leftist rival, Luisa Gonzalez.

Reserves have already dropped by $1.9 billion this year to about $6.4 billion to keep up with debt payments, the central bank said in a statement late Monday, warning there are not excess funds available. What’s more, Ecuador banned borrowing from the central bank in 2021 to comply with an International Monetary Fund loan requirement.

Noboa’s comment “runs contrary to a pro-investment growth strategy,” said Siobhan Morden, head of Latin America Fixed Income Strategy at Santander in a note. Ecuador’s difficult financial situation will weigh on bond prices “until an administration recognizes and then tackles the fiscal problem,” she added.

An entrepreneur, former lawmaker and son of a banana tycoon, Noboa’s strong showing in a first-round vote last month helped ignite a rally in Ecuador sovereign bonds, though they continue to trade at deeply distressed levels that suggest the market is expecting an eventual restructuring.

In the radio interview, Noboa said Ecuador needed to establish medium- and long-term conditions that would allow for the effective repayment of debt.

Gonzalez, who is backed by former President Rafael Correa, previously said she wanted to spend as much as $2.5 billion of the reserves, arguing that anything above $4 billion were funds that could safely be injected into the local economy.

The runoff vote is scheduled for Oct. 15.
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Credit: Bloomberg

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