(Bloomberg) -- Bolivia’s dollar bonds have soared to the highest in a year as KNG Securities turned positive on the notes and former president Evo Morales faced legal challenges, reducing his chances of returning to power in the crisis-ridden nation.
The bonds due in 2030 jumped 3.5 cents to 60.5 cents on the dollar on Oct. 10, the day KNG said the notes looked attractive because any restructuring would probably focus on deferring payments rather than cutting coupon rates or principal amounts. Dollar bonds extended gains Friday, with both 2028s and 2030s rising about 0.2 cent on the dollar, according to indicative pricing data compiled by Bloomberg. They have now rallied 8 cents this month.
The thinly traded debt seems to be particularly sensitive to analyst notes, with a previous big jump on bonds due in 2028 coming on Jan. 31 when Barclays recommended them. The recent gains were also fed by optimism Morales’ fading star could clear the way to more market-friendly leadership and multilateral support. Foreign currency reserves, meanwhile, showed their first, tentative signs of stabilizing after a nine-year slump.
Morales’ legal troubles “could be seen as a way to block him from running again in the 2025 elections,” said Mariano Ortiz Villafañe, senior economist at BancTrust & Co., who is also constructive on the bonds. “That would increase the probabilities of some sort of policy adjustments in the medium term.”
Prosecutors issued an arrest warrant against Morales for alleged statutory rape and human trafficking on Oct. 10. That is the same date as the KNG report, in which analysts warned that Morales insistence on running for the presidency could complicate the outlook for the bonds.
The extra yield investors demand to hold its bonds has fallen more than 500 basis points in the past two weeks to around 18 percentage points over similar US Treasuries, according to JPMorgan data.
Socialist Infighting
The arrest warrant for 64-year-old Morales comes amid a long-running power struggle between him and the current president Luis Arce for control of the Socialist Party, known as MAS.
The dispute has constrained the country’s capacity to implement much-needed reforms and tackle its “growing macroeconomic imbalances,” S&P Global Ratings analysts Victor C Santana and Carolina Caballero said on Oct. 4. They reaffirmed the nation’s credit rating at CCC+, seven notches into junk.
“If the investigation encourages Morales’s voters to migrate to a softer MAS candidate, this is a positive development,” Bruno Gennari, a strategist at KNG, said in an interview.
Whether Morales’ supporters swing behind Arce is up for debate. Since the prosecutor’s announcement, they have taken to the streets, putting up blockades and clashing with police. Arce said Thursday that he wouldn’t give in to the protesters.
Morales said the warrant is part of a persecution campaign by Arce and vowed to fight on ahead of elections next year.
Economic Imbalances
The government is trying to ease dollar shortages, boost supplies of food and fuel and prop up its fixed exchange rate as production of natural gas, its main export, has tumbled. Those pressures have caused foreign reserves to tumble nearly 90% in the past decade.
Reserves crept back to $1.9 billion in August from $1.7 billion at the end of last year, the central bank said on Sept. 2. There has been no update since then.
In the meantime, Gennari expects the government to continue relying on multilateral lending — with over $1 billion in loans pending approval — and gold sales to meet dollar needs, while the government avoids adjustment to foreign exchange policies and fiscal accounts during the electoral season.
Clinging On
The government doesn’t start repaying the principal on its $1.85 billion of dollar bonds until 2026, easing pressure on the current administration until after the election.
“It doesn’t make much sense for the government to default,” said BancTrust’s Villafañe. “And in case of forced default, it does not make sense to seek a too-aggressive restructuring.”
The recent rally is partially explained by Bolivia playing catch up to the outsize gains in distressed sovereign debt this year, said Barclays strategist Sebastian Vargas, who holds an overweight recommendation on Bolivia bonds. With a return of 36% this year, the nation’s dollar bonds lag those of Ecuador and Argentina, which have handed investors 71% and 66% returns respectively.
“The bonds have significantly underperformed the distress universe,” Vargas said.
Still, the nation will remain on shaky footing, said Ricardo Penfold, a managing director at Seaport Global in New York.
“I don’t think you’re getting compensated for the risks,” Penfold said. “With reserves at the level they are, it’s easy for things to go wrong.”
(Updates with bond move in second paragraph and Arce’s response to protests in 10th. A previous story corrected name of strategist.)
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