UPDATE 4-Ecuador bonds rally after banker upsets presidential election

(Adds comment from S&P Global, updates prices)

LONDON/NEW YORK, April 12 (Reuters) – Ecuador’s government bonds rallied on Monday, with some hitting their highest-ever level after banker Guillermo Lasso defied the polls and won a presidential election on promises to revive the economy.

Lasso took 52% of the vote in a runoff following a campaign that pitted free-market economics against the social welfare plans of economist Andres Arauz.

Ecuador’s recently restructured bonds rose sharply, with July 2035 paper up 15 cents at 63.3 cents on the dollar, near its record high, and the July 2030 bond up nearly 18 cents to 77.5 cents on the dollar, its highest bid since trading started in September, according to MarketAxess and Refinitiv data.

“With a supportive few months ahead, including continued IMF co-operation, we think gains will be sustained and turn bullish,” Morgan Stanley said in a research note earlier in the day.

Lasso will take office on May 24 and faces the daunting task of restarting a sluggish economy amid a new spike in coronavirus infections as the country’s vaccination efforts stall.

There are hopes, though, that he could get talks with the International Monetary Fund (IMF) about financial support back on track. Arauz, who had been favored to win earlier in the year, had pledged to tear up the IMF agreement and increase social spending if elected.

It is still too soon to discuss whether there may be any potential changes to Ecuador’s 27-month, $6.5 billion IMF Extended Fund Facility program approved in September 2020, said the Fund’s first deputy managing, Geoffrey Okamoto.

“We’ll be looking for good, close, productive engagement with the Ecuadorean government on how to set its country on a path that not only allows them to weather what remains of the pandemic’s effects, but really deliver the growth that Ecuadoreans have long sought for their country for several years now,” Okamoto said.

The Ecuadorean economy is still very fragile, according to Jupiter Asset Management’s Alejandro Arevalo, with high unemployment and low productivity. Ecuador’s Congress will be fragmented too, meaning Lasso will need to make alliances in order to get his policies through.

“But the good thing is that he has been very clear that he wants to maintain a very constructive relationship with not only the IMF but the international community,” Arevalo said.

Credit ratings agency S&P Global said the Ecuadorean government’s engagement with the IMF will be key for addressing the country’s financing gap and stabilizing forex reserves, while anchoring investor expectations.

“Nonetheless, policy execution and gaining approval of required structural reforms contained in the country’s agreement with the IMF will be difficult, especially considering the limited presence of President-elect Lasso’s CREO party in the National Assembly,” S&P said.

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