Political turmoil unlikely to dissuade investors from Colombian market

Despite the recent political upheaval in Colombia, marked by scandals involving Laura Sarabia and Armando Benedetti that led to their resignations and left President Gustavo Petro without two key government members, investors are displaying unexpected confidence in the nation’s market.

A surprising twist in this political unrest is its positive effect on investment, with investors perceiving Colombia as a less risky proposition.

A report by Banco de Bogotá’s economic team points out favorable market developments, with the exchange rate reaching levels last seen in August of the previous year.

Also, the 5-year Credit Default Swap (CDS), an indicator of country risk, has undergone a significant correction lately.

In May, the indicator closed at around 280 basis points (bp), but a strong downward trend started emerging in early June, with the latest at 253 bp, levels unseen since February 2023.

Diego Gómez, an analyst at Corficolombiana, attributes this reduced risk perception to new Finance Minister Ricardo Bonilla’s attempts to assure investors of the country’s fiscal stability, along with recent political developments suggesting that drastic economic reforms, particularly pension reforms, are unlikely to pass through Congress.

Gómez noted, “This implies a robust institutional framework in Colombia, and financial assets have reacted positively.”

“Also, the correction in inflation rates, a trend seen across most of Latin America, in a relatively calm external environment, is favoring emerging assets, as seen during this year.”

Compared to other major economies in Latin America, Colombia leads in terms of CDS downward adjustment over the past week, with a change of over -25bp, followed by Brazil at -15bp and Peru at -7bp, as per Banco de Bogota’s report.

“The relative advantage Colombia has over its regional counterparts indicates a more favorable local context perceived by investors”, the report noted.

Gómez added that the CDS trend resembles that of other financial assets, such as currency, where a greater proportional devaluation was seen in the latter part of the previous year compared to the region, with an effort to narrow this gap starting this year.

However, CDS lagged behind the peso in this regard.

Following Moody’s affirmation of Colombia’s investment-grade rating, Finance Minister Ricardo Bonilla emphasized the agency’s recognition of Colombia’s stable macroeconomic policy, commitment to fiscal deficit and current account control, robust institutional framework, and a healthy international market presence that attracts investors.

With information from Bloomberg

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