Ecuador's Bonds Plunge on Socialist Challenger's Strong Showing

Quito, Ecuador - Ecuador's dollar-denominated bonds experienced their sharpest decline in two years following the strong performance of socialist challenger Luisa González in the recent presidential election.

The bonds plunged across the yield curve in early trading, with the 2030 notes losing over 7 cents on the dollar to trade at 70.7 cents, their lowest level since January. This sell-off made Ecuador's bonds the worst performers among emerging market countries.

With 92% of the votes counted, incumbent President Daniel Noboa held a 44.3% share, while González garnered 43.8%. The results shocked investors who had bet on Noboa's first-round victory after recent polls indicated a comfortable lead.

"Investors overestimated Noboa's advantage and placed excessive trust in polling data," said Bruno Gennari, a strategist at KNG Securities in London. "The actual outcome suggests a highly uncertain second round, contradicting the previously assumed 90% probability of a Noboa victory."

Ecuador faced significant challenges when Noboa took over as interim president in 2023. The economy likely contracted for four consecutive quarters last year, and gang violence surged, making January the country's deadliest month on record.

González, a former lawmaker, has advocated for a robust welfare state and increased investment in public works. However, her conservative stance on social issues, including opposition to abortion even in cases of rape, raises investor concerns.

Leonidas Iza, representing the party for Ecuador's Indigenous communities, secured 5% of the vote, potentially holding the key to the runoff outcome. González is seen as having an advantage in courting Indigenous voters due to her ideological alignment, but fear of a Venezuela-like model could push a majority to support the incumbent, according to Gabriela Panchana, a political communications specialist.

Noboa, 37, has vowed to continue his fight against drug cartels, which led him to declare a state of emergency and deploy the army against gangs. The wealthy banana exporter's son attended Donald Trump's inauguration, making him one of only three Latin American presidents to do so.

Despite recent bond gains due to Noboa's economic policies, the country remains plagued by rampant drug cartel violence and frequent blackouts.

"Polls appeared to underestimate voter dissatisfaction with Noboa, especially in violence-plagued areas," said Risa Grais-Targow, Latin America director at Eurasia Group. "While he may still benefit from incumbency and anti-Correismo sentiments, the runoff race is shaping up to be highly competitive."

Rafael Correa, Ecuador's former president, remains a divisive figure. He presided over a period of economic growth but also faced allegations of authoritarianism and corruption charges. He now lives in exile and faces imprisonment if he returns.