The Colombian government has announced a number of steps in the past week that it hopes will reduce its external debt exposure.
First, the ministry of finance said on Wednesday that it plans to prepay a $1.25 billion Inter-American Development Bank loan in the first quarter. The treasury will issue peso-denominated bonds to buy $1 billion from the central bank, so replacing external debt with domestic.
"The measure has become possible given a $3.1 billion increase in the central bank's international reserves since the end of 2003 on the back of a 25% expansion on export revenues and over $4 billion in remittances inflows in 2004," says a research report by WestLB.
The second initiative announced was by Felipe Sardi, Colombian public credit director. He said on Thursday that holders of some international bonds would be allowed to swap their debt for domestic paper as part of an effort to reduce interest payments on external debt.
Sardi wants to reduce the share of foreign debt (of the overall debt) to 44%by the end of next year from 46%. "If successfully carried, this strategy would have some important positive effects," says the WestLB report.
The bank outlines four: the switch to local markets would make Colombia less vulnerable to external shocks; it would help tame peso appreciation as pesos are converted into dollars; it would increase domestic debt issuance at a time when conditions are favourable so keeping servicing costs low; finally, it would increase market liquidity, so allowing for better management of the 2005 budget cash-flow.
The final step announced last week was that the government would attempt to lengthen Colombia's debt maturity. Colombia intends to buy back the debt maturing through 2008 and exchange it for debt with longer maturity. The most likely maturity for new bonds, according to WestLB, is 2014/15 "since the country's repayment schedule is not heavy in those years."
Overall, says the German bank, these are positive measures "as they could reduce liquidity and exchange rate risks for Colombia's debt management in the future."
"The risk is that the government takes advantage of the current ample liquidity in domestic capital markets to not only improve its debt profile, but also to finance possible additional financing gaps, so reducing incentives to pursue privatisation and government spending cuts."
The 2005 government deficit is already expected to increase to 2.5% of GDP, according to the new IMF standby-by arrangement, which is being finalized, as compared to 2.3% of GDP in 2004.