Ecuador Bonds Plunge as Pro-IMF Candidate Lags in Vote Count

Ecuador’s dollar bonds slumped after investors’ preferred candidate unexpectedly trailed two rivals in Sunday’s presidential election.

The nation’s recently restructured bonds due in 2030, 2035 and 2040 headed for their worst day since last year’s debt exchange.

Andres Arauz, a socialist economist who rejects fiscal austerity demanded by the International Monetary Fund, won the first round. He’ll face either Yaku Perez, from the indigenous party Pachakutik, or the banker Guillermo Lasso in a runoff on April 11.

Ecuador Bonds Plunge as Pro-IMF Candidate Lags in Vote Count

The nation’s bonds due in 2030 slipped 4.2 cents on the U.S. dollar to 58.8 cents, while the 2035 and 2040 notes also slid.

The race for second is very tight. Perez leads Lasso by just 15,000 votes with some 190,000 ballots yet to be counted, according to Ecuador’s electoral body. Investors had been betting that the pro-Washington, pro-IMF candidate Lasso would make the second round.

“From an economic policy perspective, a run-off between Mr. Arauz and Mr. Perez would be like a beauty contest between Dracula and Frankenstein,” TPCG Valores SA’s Juan Manuel Pazos and Victoria Faynbloch wrote in a report. “Even if Mr. Arauz tacks toward the center, we expect a left-leaning, domestic market minded economic policy from the next administration.”

The latest tally shows Arauz with 32.2% of the votes. Meantime, Perez has 19.8% to Lasso’s 19.6%. Polls mostly predicted that Lasso would comfortably advance to the second round, so the surprising runoff between two left-wing candidates hadn’t been priced in by bond investors, according to Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont in New York.

Lasso hasn’t conceded, and he could still get enough votes to advance.

Voter Anger

Voters weren’t won over by Lasso’s calls for market-based solutions, and wanted stronger pledges of income redistribution, said political scientist Simon Pachano at FLACSO University in Quito. He also blundered by failing to pick a woman as his running mate, as Perez did, according to Pachano.

Voters angry at the state of the country, which is enduring one of the deepest economic contractions in the region, wanted something other than the policy continuity Lasso was offering, said Eurasia Latin America Director Risa Grais-Targow.

“It’s a change election and voters are looking for something that’s dramatically different than what they have today and Lasso’s challenge is that he’s the ultimate elite establishment candidate, he’s a banker,” Grais-Targow said in a phone interview.

President Lenin Moreno, who didn’t seek re-election, has approval ratings below 10%.

Perez opposes mining projects and wants to renegotiate Ecuador’s debt, while Lasso backed the International Monetary Fund deal and wants the country to have warm relations with Washington.

“While investors’ concerns about a potential Arauz administration appear to have eased recently, the non-negligible possibility of a victory by Mr. Perez instead may be harder to absorb,” said Goldman Sachs analyst Tiago Severo in a note.

Acrimonious Relationship

Arauz, 36, is a protégé of exiled former leader Rafael Correa, who allied the country with the socialist governments of Venezuela and Cuba and who often had an acrimonious relationship with Washington.

Arauz has pledged to provide $1,000 to 1 million needy families and says he’ll avoid austerity measures of the kind Ecuador agreed to as part of an agreement with the IMF last year.

Ecuador Presidential Candidate Perez Calls for Debt Talks

Lasso, 65, says he’d boost the monthly minimum wage to $500 from $400. Perez, 51, has called for negotiations with creditors to extend maturities and lighten the debt burden as the nation recovers from the economic slump. In 2017, he changed his first name from Carlos to Yaku, which means water in the indigenous Quichua language, to signal his concern for the environment.

Fractured Congress

With 80% of the votes for congress counted, Arauz’s Centro Democratico was on course to get about 49 seats of the 137-member legislature, followed by about 27 for Pachakutik. Lasso’s CREO party may win about 12 seats, with the rest of the chamber split between the Democratic Left party, the Social Christian party and smaller parties, according to an analysis by NGO Fundacion Ciudadania y Desarrollo. The fragmented chamber will likely make it harder for the eventual winner to govern.

Whatever the election outcome, the Moreno will stay the course on its fiscal austerity program during its final weeks in office, Finance Minister Mauricio Pozo said in an interview on Monday.

In the second round, the candidates will need to issue pragmatic statements to calm centrist voters and investors, Pozo said. The new government is set to take office on May 24.

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