Bolivian bonds rally on hopes election could pave way for economic reform

By Johann M Cherian

Aug 18 (Reuters) - Bolivia's international dollar bonds hit a record high on Monday after early official results put the ruling socialist party on track for its worst election defeat in a generation.

Investors hoped a turn away from the leftist party that has dominated the country since 2006 could help Bolivia turn around its ailing economy, avoid a debt default and pave the way for an International Monetary Fund program.

Eduardo del Castillo, the Movement for Socialism's candidate, only secured roughly 3% of the first-round presidential vote, according to initial results.

Bolivia's bond maturing in 2030 rose more than 3 cents on the dollar to bid at 79.88 cents, according to Tradeweb data, adding to a rally that has placed them among the top performers in JPMorgan's emerging markets bond index.

Centrist senator Rodrigo Paz led with just over 32% of the vote in initial results, while Conservative former president Jorge "Tuto" Quiroga of the Alianza coalition was second with nearly 27%.

"It feels like a best case outcome for the country - at least in the medium term," said Ajata Mediratta, partner at Greylock Capital Management. "But the challenges facing the ultimate victor are daunting in the short-term."

Full official results will be announced within seven days, and if no candidate obtains more than 40% of the vote, there will be a runoff on October 19.

London-based investment firm Tellimer upgraded its recommendation on the country's bonds to 'buy' from 'sell' following the election outcome.

The South American nation of 12 million people is mired in an economic crisis marked by record-low foreign exchange reserves, inflation at a four-decade high and looming debt payments.

Earlier this year, the three major credit rating agencies downgraded Bolivia's rating deeper into junk, with S&P Global citing potential trouble looming for debt service payments.

Investors broadly view Quiroga as the ideal candidate, given his previous political experience, work with the World Bank and IMF and market-friendly policy promises.

Carlos de Sousa, portfolio manager with Vontobel, said Paz's surprise lead in the first vote gave some investors pause.

"I think markets would be disappointed if he wins the second round and then decides to ride out the crisis alone without the help of the IMF," de Sousa said of Paz, adding that the IMF offered credibility and relatively cheap financing.

"Solving the crisis without external help would be more difficult and would require a tougher economic adjustment," he added.