President of Ecuador offers the best global bond returns

At a time when bond investors have been hurt almost everywhere, a developing nation infamous for being a serial defaulter has emerged as a bright spot.

Ecuadorian dollar bonds have returned 6.4% this year, compared with an average loss of 4.2% for emerging markets, according to data compiled by Bloomberg. They have fared even better since the election of conservative President Guillermo Lasso in April, up 45%, the best among emerging markets.

While the prospect of interest rate hikes from the Federal Reserve and a conflict between Russia and Ukraine have dampened investors’ appetite for riskier assets, Ecuador’s bonds are proving resilient. That’s partly thanks to a 23% rally this year for oil, the country’s top export.

Investors have also been encouraged by Lasso, who has managed to close a new agreement with the International Monetary Fund and reduce the fiscal deficit.

Ecuador’s international reserves have increased 45% in one year to US$8.41 billion, about 8% of gross domestic product and close to a record.

“It is one of the few countries that managed to implement structural reforms in recent years,” said Henry Stipp, an investor at Mackay Shields UK in London. Ecuador “You’re doing the right thing.”

After defaulting in 2020 for the ninth time in its history, Ecuador restructured its debt. Then came Lasso’s surprise runoff victory in April 2021. His notes now yield about 7.6 percentage points over U.S. Treasuries, down as much as 12 percentage points a year ago. JPMorgan Chase & Co. indices show. On Tuesday, BancTrust recommended buying Ecuadorian bonds, citing rising oil prices.

Investors also cite Lasso’s successful vaccination campaign among the positive catalysts for the economy. Despite a hostile opposition majority in the National Assembly, Lasso was able to fast-track a tax reform that raised taxes on high-income individuals and large businesses and included a temporary wealth tax to meet terms agreed with the IMF.

Lasso reduced the fiscal deficit, which the Minister of Economy and Finance, Simón Cueva, expects to drop to 2% of gross domestic product (GDP) this year, compared to 3.5% in 2021.

Ecuador could receive this quarter “a little morethan the $700 million he originally expected from the IMF, Cueva said in an interview this month. By the end of the year, the nation will have finished implementing reforms under its $6.4 billion IMF deal and will explore a possible new program with the Fund, he added.

Some technical factors could have helped the bonds. In addition to the obvious benefit of oil prices, Ecuador’s relatively shorter-term debt profile has fared better amid rising global rates. Its three bonds on the market mature in 2030, 2035 and 2040.

Despite the optimism, Lasso walks a tightrope to push for change without upsetting unions, powerful indigenous groups and political rivals. He is trying to attract investors despite a legislature controlled by anti-business interests, as populist supporters of former President Rafael Correa hold the largest bloc of seats.

“Political stability is not necessarily a strong point in Ecuadorsaid Cathy Hepworth, head of emerging markets debt at PGIM Fixed Income. “Oil prices clearly helped them a lot and they handled the relationship with the IMF better than people would have thought.”

Lasso, a 65-year-old former banker, has toyed with the idea of ​​a quick return to the markets. While a bond sale would mark a normalization of relations with the market once the deal with the IMF is finalized later this year, Cueva says Ecuador will only pull the trigger in an orderly and transparent manner. Alejandro Arreaza, an economist at Barclays Plc., wrote in a report that the most prudent thing would be to reduce the size of the issues or avoid a sale.

Investors are also looking for progress on business-friendly changes to labor and investment laws. Lasso presented on February 22 an accelerated bill that aims to attract foreign investment through public-private partnerships and in free zones.

“Ecuador has been rock solid, and that’s a function of Lasso’s ability to carry out his reform agenda,” said Patrick Esteruelas, head of research at Emso Asset Management.