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Debt concerns beginning to mount
Even if the current fiscal measures are approved, a substantial decline in
tax income resulting from lower growth or lack of legislative approval for
the aforementioned tax measures could force the government to increase its
bond issuance in the capital markets at a time when regional contagion and
corporate scandals in the United States have heightened international
investors’ risk aversion. While the government has fulfilled this year’s
financing requirements, external borrowing requirements for next year are
estimated to reach US$ 4.0 billion. A successful renewal of the IMF
agreement could help secure some US$ 2.2 billion from multilateral
financial institutions but the balance would have to be raised in capital
markets. However, more cautious international capital markets will make
next year’s goals difficult to reach, particularly if the current subdued
economic growth trend persists and the fiscal deficit is not reined in. In
recent months, borrowing costs have increased significantly and the
exchange rate has weakened. At 901 basis points in August, the benchmark
EMBI+ Colombian sovereign bond spread to comparable US Treasury bonds is
at historical highs. At current levels, the spread is 370 basis points
above risk spreads at the end of last year, which now puts Colombia’s
sovereign risk just a notch below Turkey. Continued adverse international
capital market conditions could force the government to increase local
borrowing, which will exert upward pressure on interest rates, crowd out
local borrowers, pre-empting the current economic rebound. The
international rating agency Fitch Ratings lowered its outlook for
Colombian sovereign debt from ‘stable’ to ‘negative’ citing fiscal
uncertainty and lower growth. The agency is concerned that failure of the
legislature to approve important tax and pension reforms and the
government’s desire to significantly step up military and social outlays
could force increased debt issuance and further undermine debt-to-GDP
ratios. Total external debt has grown notably in the past five years.
While in 1998 external debt accounted for 34.4% of GDP, the figure rose to
43.4% of GDP by the end last year.
Peso pressure persists and forces
Central Bank to raise interest rates
The peso continued the weakening trend observed since the May elections.
Since the end of May, the currency has now depreciated 14.4% in nominal
terms to the US$. Following the strong 8.6% depreciation in July, the peso
lost an additional 3.2% in August. The persistence of the peso
deterioration forced the Central Bank to raise interest rates on the
benchmark DTF rate by 26 basis points in August, the first hike since
December of last year. Panellists now expect the currency to depreciate
strongly
this year. Nevertheless, panellists have maintained inflation
forecasts.
The current inflationary outlook is likely to prompt the Central Bank to
tighten monetary reins further with the benchmark DTF seen to rise
by the end of the year.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Colombia. For more details please click here.
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