El Salvador Bond Yields Surge After Presidential Election

(Corrects year of bond’s maturity to 2025 in last paragraph. Story originally ran on Feb. 3.)

El Salvador’s benchmark borrowing costs rose the most in emerging markets after the ruling party’s candidate in yesterday’s presidential election did better than some analysts forecast, just missing an outright win.

The extra yield investors demand to own the Central American country’s bonds instead of Treasuries rose 0.36 percentage point to 5 percent, the most among 56 developing nations tracked by JPMorgan Chase & Co.’s EMBIG index.

With 99.2 percent of precincts counted, Vice President Salvador Sanchez Ceren had 48.9 percent of the vote compared with 39 percent for former San Salvador Mayor Norman Quijano, according to a preliminary tally, setting up a runoff for March 9. Investors are concerned that Sanchez Ceren would be more likely to imperil the government’s finances by boosting spending on social programs beyond levels set by current President Mauricio Funes, according to Barclays Plc.

“The uncertainty about whether Sanchez Ceren would follow the moderate line of President Funes or take a more radical one still exists,” analysts Alejandro Arreaza and Alejandro Grisanti wrote in a research report today. “If a more radical stance is taken, we remain of the view that increasing polarization could affect even more the ability to reach agreement in the legislature and lower investment would constrain growth even more.”

Economic growth has averaged about 2 percent under Funes, whose administration has aided farmers and given free uniforms and milk to school children. Funes also backed a 2012 truce with street gangs that saw the murder rate fall in half, according to official data. El Salvador is the world’s most-violent country after Honduras, according to the United Nations.

Social Programs

“The vast majority of Salvadorans are poor or of very modest means, and social programs under the Funes government have been highly visible,” said Cynthia Arnson, director of the Latin American program at the Woodrow Wilson International Center for Scholars in Washington D.C. Quijano “just isn’t trusted to deliver the same kinds of benefits.”

According to the government, El Salvador averaged 6.6 murders a day last year after falling to four a day during the first months of the truce, in which the gangs agreed to lower the homicide rate in exchange for better prison conditions for jailed leaders. The rate was as high as 14 per day before the truce.

Both candidates said they would court supporters of former President Antonio Saca, who conceded defeat after finishing in third place with 11.4 percent.

“If we got the win in the first round, we will triumph in the second,” Sanchez Ceren, a 69-year-old former Marxist rebel leader who has called for closer ties with Venezuela, told supporters of his Farabundo Marti National Liberation Front yesterday.

El Salvador’s $800 million of bonds due in 2025 fell 4 cents to 85.4 cents on the dollar, pushing yields up 0.60 percentage point to 7.89 percent, the highest since the securities were issued in 2012.

To contact the reporter on this story: Eric Sabo in Panama City at esabo1@bloomberg.net

To contact the editors responsible for this story: Bill Faries at wfaries@bloomberg.net; Brendan Walsh at bwalsh8@bloomberg.net

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