(Bloomberg) -- Daniel Noboa won over investors when he came to office as the fresh-faced, millennial leader of Ecuador, vowing to overhaul the nation’s troubled economy and tackle rising crime.

Six months later some of those same money managers are pulling back on what has been the best trade of the year in emerging-market debt.

Opinion polls suggest Noboa’s popularity is slipping at home and investors see less value in the bonds after the 80% rally since Noboa took office in November. That prompted Bank of America Corp to downgrade its recommendation on Ecuador’s dollar bonds last week. Goldman Sachs & Co. and BancTrust & Co. have also closed bullish calls. 

At issue is whether the 36-year-old president will have enough momentum to win reelection early next year when his abbreviated first term ends. Fading support for the business-friendly Noboa may hurt his chances of driving down debt, and while no serious rival from the left has emerged yet, investors are wary of rapid political shifts in a country that has defaulted 11 times since its independence.

“Investors are aware that the lead-up to the early 2025 election will be very complicated,” said Sarah Glendon, a senior analyst at Columbia Threadneedle Investments. “While it is true that Noboa benefits from the absence of a strong opposition, he also faces a weak economy, as well as security and electricity crises.”

The extra yield investors demand to hold Ecuador’s dollar bonds has widened more than 130 basis points in May, according to JPMorgan & Chase data. The country’s debt is the one of the worst performers among emerging-market government notes over the past month, down 3.2%, according to data compiled by Bloomberg.

It’s a reversal for a trade that took off at the start of the year as Noboa, heir to a banana fortune, pulled off a tax reform and struck a $4 billion loan agreement with the International Monetary Fund. Investors jumped into the country’s distressed notes, with prices on the 2035 note rising to as much as 56 cents on the dollar, from around 36 cents. 

The rally has since petered out, with the bonds trading around 52 cents on the dollar this month.

Noboa’s popularity has also waned — a Comunicaliza poll released last week showed his approval rating at 59%. While that’s still high for a Latin American leader, it compares to 80% back in January.   

Adding to concerns, the Ecuadorian economy is expected to slow this year, while the start of the dry season around August could affect the nation’s electricity supply, which has been interrupted in recent months as hydroelectric reservoirs dried up. 

Those factors could further erode the government’s popularity, BofA analysts including Lucas Martin wrote in a note. “Recall that Lasso enjoyed very high initial popularity following a successful vaccination campaign, but it eroded quickly afterward,” they wrote, referring to the country’s previous leader.

On top of that, Ecuador’s constitutional court is debating the legality of a hike in the value-added tax that Noboa pushed through as a revenue measure. A setback could add to fiscal pressures. 

Some firms including AllianceBernstein still like the credit from a medium-term perspective. A potential issuance of blue or green bonds to buy back debt later this year could reduce risks, and there will be a step-up in coupons in August, according to Jared Lou, a money manager at William Blair International in New York.

But Noboa will need to carry out a fiscal consolidation program while also managing to prevent a further decline in his popularity before general elections, expected for February. He also faces a complex security situation, with drug traffickers wreaking havoc across the country. 

Ecuador has “very few” positive catalysts in the near term, said Ricardo Penfold, a managing director at Seaport Global in New York. “We will be in a period of limbo for a while.” 

--With assistance from Stephan Kueffner.

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