Colombia feels the loss of investment grade in sale of dollar bonds

Colombia felt the blow from the loss of its investment grade and investor fears about the direction of the economy in the first sale of international bonds by the government of President Gustavo Petro.

The nation sold a dollar-denominated bond due 2033 for a yield of 8.1%, compared with 3.4% it paid on 10-year bonds maturing in April 2020.

The government will use that money to buy back short-term debt and increase its cash balance.

Other emerging markets have also been hit by rising dollar borrowing costs, as the US Federal Reserve has raised rates to curb inflation. But Colombia has been among the hardest hit, amid a loss of investor confidence in the country.

Since Petro won elections in June, some investors have exited Colombian assets. The cost of insuring Colombia’s debt against default, as measured by five-year credit default swaps, now trades above Brazil’s, whereas a year ago it was lower. The Andean nation lost its investment grade in mid-2021.

William Snead, a strategist at BBVA in New York, said the government took advantage of the lower spread and lower US Treasury rates during the month. However, investors still have many doubts about Colombia.

Colombia’s credit is not as attractive at the moment, mainly due to fundamental external and fiscal challenges and uncertainties regarding Petro’s spending plans, he said.

“Keeping up with President Petro‘s social spending goals while trying to maintain fiscal responsibility seems like a difficult balancing act, and credit rating agencies could be vigilant, and Colombia has not ruled out a return to international markets, which It has been another reason for the poor performance”.

Meanwhile, Jared Lou, a strategist at William Blair Investment Management, considered the deal costly due to the low dollar prices of existing bonds.

“The low dollar prices of many non-investment grade issuers could make new deals less attractive.”

He added that there are some other concerns. For example, how the composition of the board of the central bank could be changed, since the independence of the bank is a pillar of investor confidence.

“The technocratic skills within Colombia are pretty strong and have really helped hold the economy together,” Lou said.

For his part, Munir Jalil, chief economist for the Andean region at BTG Pactual, believes that the sale of Colombian bonds worked well —given the circumstances—, despite the high interest rate compared to the similar maturity bond issued. last year. A demand greater than 2.5 times showed a good level of appetite.

“The fact that the government has used the money for a debt management operation and is saving the balance to cover debt service for 2023 and 2024 is also good news, as it shows that the government does not plan to spend the money, but use it to borrow service”.

There are no metrics to compare with peers, but looking at the 5-year CDS, “it shows us that the market asked for a country-friendly interest rate slightly below Colombia’s current rating,” Jalil said.

With information from Bloomberg Línea

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