(Bloomberg) -- Ecuador’s worst drought in over six decades has led to forest fires, nationwide blackouts and forced its leader to shorten a New York visit. It now has investors fearing his approval ratings will take a hit.
Daniel Noboa, the 36-year-old president who won over Wall Street by pledging to fix the country’s economy, scrapped his US agenda that included a planned speech at the United Nations General Assembly last week to return home. The fires have been largely contained, but brownouts continue to sweep through the nation as reservoirs remain at critical levels.
All that has led bond investors to turn increasingly cautious on the outlook for Ecuadorian debt. Bonds have lagged nearly all emerging peers over the past week, posting the second-worst performance with a 3.25% loss, indicative pricing data compiled by Bloomberg show.
“There’s a concern that the frequency and duration of the blackouts will start to impact Noboa’s popularity and, in turn, the probability of him being reelected,” said Katrina Butt, senior economist at AllianceBernstein.
The latest crisis may hurt business-friendly Noboa’s chances of getting elected in February and further implementing a fiscal adjustment that’s been key for the country to secure funding with the International Monetary Fund.
“Risks have increased lately,” said Carlos de Sousa, an emerging market debt portfolio manager at Vontobel Asset Management, adding that he expects Noboa to win reelection, potentially with a majority in congress. “But there’s a risk his popularity will decline due to the blackouts, particularly if he doesn’t manage to fix the situation quickly.”
Noboa’s 31% approval rating puts him firmly ahead of rival candidates Luisa Gonzalez and Jan Topic, according to a recent CID Gallup poll in September. Still, 21% of the respondents remain undecided, the poll showed.
The South American country is likely to get approval of the first IMF review in November, while foreign-exchange reserves are recovering at a faster-than-expected pace, de Sousa said. Still, “short-term politics will play an important role,” he said.
Ongoing Crisis
Ecuador’s debt has delivered an outsize return of 75% for investors this year, compared to an average of 8.4% in emerging markets, as market-friendly Noboa leveraged the country’s security crisis to boost his popularity and pass fiscal reforms.
Investors are also waiting for the launch of a debt-for-nature swap this year, which is expected to help Ecuador manage its debt financing costs and will provide positive upside to the bonds, said Butt.
Still, having profited from this year’s rally, some investors are paring back exposure especially after trouble in the past week, including the forest fires that forced Noboa to cancel his New York engagements, brought attention to the ongoing crisis in the country.
Presidential elections are less than five months away. The run-up to the vote, Noboa’s efforts to address blackouts and ongoing security issues are likely to continue to weigh on bonds in the short-term, said Ramiro Blazquez, head of research at BancTrust & Co.
“Challenging times lie ahead for the government as negative headlines continue to pile up,” he said, though arguing that Noboa could navigate through this bout of negative news flow when the dry season ends. “But in the transition to that, we can have a decline in popularity that may make investors uneasy.”
--With assistance from Stephan Kueffner.
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