Colombia looks to revise debt composition amid transitional year

Colombia looks to revise debt composition amid transitional year

Economy & Policy Capital Markets Colombia

Colombia is moving towards a greater reliance on local currency peso-denominated debt amid a year of political transition for the oil-exporting sovereign issuer.

In an interview with LatinFinance, Colombia’s Minister of Finance said the ideal composition of the country’s debt was split 70% in pesos and the rest in foreign currency.

Domestic currency served as a more optimal strategy because it protected Colombia from any currency depreciation and drastic changes in external market conditions.

“It is part of a strategy that relies less on external financing because of the need to go back to the 70:30 ratio,” Cárdenas said. “We like the idea of depending less on foreign currency public debt.”

Presently, Colombia’s debt composition has deviated towards foreign currency, but Cárdenas believes this was because of the depreciation in the Colombian peso.

This year, Colombia has not yet tapped the international debt capital markets, and to get back to the 70:30 ratio, the sovereign issuer will only seek 16% in foreign currency debt this year.

“That 16% we can achieve with pre-financing we did last year plus some borrowing from multilaterals,” Cárdenas said, adding that there was no need for international bond issuances in 2018.

Colombia will gain roughly $2.6bn this year in bilateral and multilateral debt, and to date, the country’s finance ministry has received roughly $1.2bn.

Expanding peso opportunities

To increase Colombia’s reliance on local capital markets, the central bank has welcomed participation from foreign investors buying into Colombian bonds. According to Cárdenas, this participation has increased to 26% from 3% since 2012 and local corporate issuers have also started seeking more duration in their peso-denominated securities.

“The market has benefited from an additional player,” he added of international participation. “We need to have a deeper local capital market and encourage more companies to issue bonds.”

Since the inception of Colombia’s 4G toll road program, construction companies such as Odinsa or its parent Grupo Argos have sought longer-dated peso bonds, while financial institutions have tapped the market regularly.

However, sources have said the next step is to expand conditions enabling lower-rated corporates to access the local markets.

As a member of the Pacific Alliance (PA), Colombia has also opened its capital market to pension funds from neighboring PA members Mexico, Peru and Chile.

“We bring them in with a tax exemption… they essentially do not pay corporate taxes, so we have to get more appetite and then firms will issue more instruments,” Cárdenas added.

Tackling the downgrade and Venezuela

Last December, S&P Global Ratings downgraded Colombia a notch to BBB- from BBB because of weaker-than-expected growth and a partial reliance on one-off revenues in 2017.

And with a presidential election on the horizon, the Finance Ministry’s focus has been on reining in the country’s fiscal deficit and pulling inflation back towards a target range. Presently, inflation is at 3.1%, while Colombia’s current account deficit is roughly 3% of GDP.

Cárdenas reckons macroeconomics, combined with conservative fiscal policy has given the buyside enough confidence in the run-up to elections in May.

“The impression is that Colombia is in a good position vis-á-vis this election,” he added. “The numbers we have this year show that there is an increase in capital inflows.”

In getting Colombia back to BBB status, Cárdenas placed the responsibility with the next administration, but opined that the first step would be to change the country’s outlook from stable to positive.

Meanwhile, Colombia, with the US Treasury, cited new evidence of fraud in Venezuela’s food import program that alleges funds have ended up in the hands of government officials after they were funneled through businesses set up in “fiscal havens.”

“We found some evidence that there is a leakage of Venezuelan resources that stay abroad in fiscal havens,” Cárdenas said. “There is a deviation of resources in Venezuela that should be going to the hands of the poor.”

Roughly 700,000 Venezuelans are living in Colombia and this figure is expected to grow as Venezuela’s economic situation weakens.

“They need jobs in Colombia, they want to earn some money to remit back to Venezuela, they demand social services and these things are costing as Colombia is providing that from our budget,” Cárdenas said. “This is something we are doing on our own, but we are worried because the numbers keep growing.”

About 45,000 people are crossing the border daily, including those that return to Venezuela at the end of each day.