Elections make Colombia to be seen as riskier than Brazil

RIO DE JANEIRO, BRAZIL – Just a year ago, Colombia lost its investment grade and was in the same rating level as Brazil; despite this, the figures show that the projections favor Colombia, but despite its good forecasts, today, the world sees it as a country exposed to more risks than Brazil.

The electoral issue has captured the attention of investors, as Colombia is about to choose between two anti-establishment candidates. On the one hand, Gustavo Petro, a leftist leader, and on the other, Rodolfo Hernández, a construction businessman who has been involved in several controversies during his political life.

Alejandro Di Bernardo, a credit analyst in the Fixed Income team at Jupiter Asset Management, spoke to Bloomberg Línea about the region and how Colombia is perceived in the coming years.

The analyst exposes that Colombia today pays a higher premium than Brazil even though its fundamentals give better signals.

“It is interesting because if we leave aside the political issue and look only at the macroeconomic, Colombia’s CDS should be below Brazil, but what we saw this year is that this relationship was reversed, and now Colombia pays around 20 basis points more than Brazil.”

Di Bernardo maintains that “if we look at the macro, we find that Colombia has a lower level of debt over GDP than Brazil, it will show a higher growth, and in fundamental terms, it will be better than Brazil this year, so many of the spreads we see reflect the nervousness about the elections and the future will depend on what happens with that”.

The analyst also says that this is a particularity that Jupiter has seen in the region.

“In Latin America, we see three main trends:

“1) The anti-system vote and it is happening right in the post-covid era; we saw it in Chile, we see it in Argentina, in Peru, and now in Colombia.

“2) The polls do not necessarily reflect what is going to happen, and that often happens because voters make decisions the days before going to vote, so there are large proportions of blank votes, which makes it differ significantly between the survey and the final result.

“3) We see fragmented congresses. In the past, we had traditional parties, and in the countries and today, there is a fragmentation of government, and that is what generates uncertainty and political volatility, and that is reflected in the spreads.”

Despite this, Di Bernardo assures that the projections for Colombia, for now, are positive.

“Latin America’s average growth will be 2% despite the rise in raw materials. This time, unlike in the past, it is not due to higher demand but low supply. However, we estimate that Colombia will grow around 5%”.

The expert clarifies that despite the uncertainties in Colombia and, in general, in the region, the electoral result is not enough to improve or worsen the country’s vision. Still, they will wait to know what the plan that the next president will try to promote will be.

“We believe that we need to see political stability and a credible long-term plan in the region. One needs a macroeconomic plan and long-term sustainability of your debt; that is what we are interested in as bondholders, to see debt levels stabilizing,” says Di Bernardo.

He says that in the immediate future, the outlook is settled. “Whoever wins, Colombia’s macro economy will be better in 2022 than in 2021, but we need to see a long-term macroeconomic plan, and that plan should take into account the fiscal part, a reduction of the deficit, and improvements in investment issues so that growth is sustainable and not only because of commodities,” Di Bernardo said.

Although the Colombian government has said that in the short term, fiscal reform is not required, the Jupiter analyst says that “in the long term Colombia needs a fiscal reform because the deficit level requires a reduction, we believe that in 2022, it will be reduced due to the price of raw materials, but after 2022 towards 2023 and 2024 we will have to see a concrete deficit plan”.

Finally, regarding the interest rates of the Bank of the Republic, he says that “as long as inflation in Colombia remains at high levels, the Bank of the Republic will have to continue raising rates, while other countries such as Brazil and Chile are going faster. We expect the rate to reach 8%, but all this has to be reflected in lower inflation”.

With information from Bloomberg