Colombia's government is making a strong effort to reduce the country's exposure to dollar-denominated debt. A rigorous debt management strategy is in place to use the domestic market as the main financing source and to lessen the effect of external shocks, such as a hike in US interest rates.
The finance ministry wants to prepay a $1.25 billion loan to the IDB by the end of the first quarter. Two initiatives were announced in February to swap external, dollar-denominated debt into domestic paper. The first will see the issuance of a peso-bond to buy back $1 billion from the central bank; the second will allow global bondholders to swap their debt into peso issuance.
"Colombia's external debt is still big and has to be reduced," says Nicolas Tingas, head of markets research at West LB. "The IMF is making strong demands to do something about the deficit." And with international interest in local markets running high, the government is making the most of this chance to reduce exposure to foreign currency.
High demand
In February, Colombia issued its second peso-denominated global bond. High demand, especially from the US, led the government to raise the initial offer from the equivalent of $300 million to $325 million. As well as getting access to higher-yielding local currency bonds, investors benefited from the peso's appreciation against the dollar at that time. "People felt very comfortable with the currency," says one fund manager.
The peso has since weakened on the back of central bank intervention, which has led some investors to believe that interest in Colombia's local debt might be on the wane. "We have seen the peak of interest in local markets, especially in peripheral ones like Colombia," argues the fund manager. "It will probably fall as the rout of the dollar is coming to an end. It was smart for Colombia to issue while there was appetite."
Other investors disagree. "Overall, the [potential] yield is healthy," says Edward Gutierrez, portfolio manager at Deutsche Asset Management. "Going forward, good support will probably continue." However, the foreign exchange play remains crucial. "The biggest risk lies in the unwinding of the favourable forex," he adds.
Colombian comfort zone
Domestic investors also play an important role in Colombia's economic recovery. "Colombians are more comfortable investing in their domestic market," says Morgan Harting, senior director for sovereigns at Fitch ratings agency. "They are repatriating capital instead of sending it abroad. If this situation continues, Colombia could see 3% GDP growth over the next [few] years."
"Our outlook is 3.5% to 4% growth over the next years," agrees Carola Sandy, analyst at CSFB, "but there are important risks." One is the outcome of President Uribe's re-election bid that is pending in the Constitutional Court. At the moment, the constitution restricts presidents to only one term in office. "Uribe's popularity is 50% in vote simulations," adds Sandy. "The next candidate has 11%. There would be a political void if Uribe can't stand."
Disappointment
Market players are disappointed at Uribe's failure to deliver as many reforms as expected. But his presence is perceived as an important factor in continuing confidence and stability. "The Uribe administration has far more support than previous governments, because of the security reforms," says Gary Leech, editor of Colombia Journal, a US publication. "But many are critical of the economic policies."
According to some experts, Uribe has not done enough. "I've been disappointed," says Gutierrez. "The tax reform bill was killed off; the pension reform was a positive surprise; but the benefits don't kick in until 2010." Uribe's term ends in September 2006, but with elections drawing closer, the impetus for reform has passed, he adds.
Hiatus
"No member of congress wants to be seen supporting unpopular fiscal reforms," says Sandy. "We don't expect anything meaningful in this area before the elections."
Public opposition against the reform process is strong, and last year saw mass demonstrations against the government. The dissatisfaction stems from the continuing inequality and poverty prevalent in Colombia. "The [IMF's] structural adjustment programme has not brought benefits for the majority," says Leech. "The poverty rate increased by 7% since the 1990s."
But, according to Sandy, broader social sentiment is likely to ensure that Colombia's government maintains the path of macro economic restructuring and fiscal tightening. "Ultimately, the electorate is quite conservative," she says. "I think it will continue to favour a market-orientated candidate."