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International
market risk aversion makes multilateral agreement more pressing
In the absence of multilateral support the government would be forced to
seek funds in the capital markets. However, international markets have
become increasingly concerned about Latin America exposure and are more
risk averse as a result of accounting scandals in the United States. The
current flight to quality by international investors is reflected in
Colombia’s sovereign risk spreads. In September, the benchmark JP Morgan
EMBI+ Colombian sovereign bond spread to comparable US Treasury bonds
reached historical highs, deteriorating 116 basis points compared to the
end of August and ending the month at 1,067 basis points to the US
Treasury. Since the end of last year, the sovereign risk spread has almost
doubled and is now close to reaching Venezuelan levels. Since
international markets remain virtually closed to Latin American borrowers,
the government would either have to rely on the domestic capital market to
finance borrowing requirements and crowd out local borrowers or cut back
spending at a time when the Uribe administration is eager to come through
on election promises. Participants have undertaken further revisions to
their fiscal forecasts this month. Furthermore, panellists have revised
their forecasts for next year’s fiscal deficit down a notch, which remains
above the government’s 3.0% of GDP target.
Contagion and fiscal situation
pressure currency
The peso continued to lose ground relative to the US$ in September,
depreciating 4.3% in nominal terms and reaching 2,833 pesos to the US$.
The September rate exceeded the August weakening of 3.2% and brought the
accumulated or 12-month depreciation to 19.1%. Similar to other currencies
in the region, the peso has suffered the consequences of contagion from
neighbouring Brazil. However, the weakness also increasingly reflects
mounting concerns about the sustainability of the government’s current
fiscal position. So far, the Central Bank has not acted to tighten
monetary reins despite the increased likelihood that the currency
weakening may pass-through to domestic prices. As such, interest rates on
the benchmark DTF rate by remained virtually unchanged in September.
Participants, however, have again revised their projections for this
year’s year-end exchange rate - 3.3% weaker than last month. The
currency is anticipated to stabilize somewhat next year, depreciating 5.0%
by year-end.
External accounts deteriorate amid
weak export growth
In the second quarter the current account deficit reached US$ 523 million,
which was up from US$ 279 million in the first quarter. As a result, the
annual current account surplus rose to US$ 1.3 billion. The key force
behind the current account weakening was narrowing of the trade surplus
from US$ 228 million to just US$ 37 million, as exports dropped 0.1% over
the same quarter last year. The services balance deficit decreased only
very moderately from US$ 354 million to US$ 351 million. The capital
account surplus, in turn, expanded from US$ 49.5 million to US$ 441
million and helped compensate for the current account shortfall.
Participants expect the current account deficit to widen further this
year, as more moderate trade growth will curtail further improvements in
the trade balance.
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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