Colombia’s financing needs will keep dropping as tax collections rise and the budget deficit narrows, Public Credit Director Maria Fernanda Suarez said.
“We expect the trend to continue in 2013,” Suarez, who took the post at the beginning of this year, said in an interview yesterday at her Bogota office. “As we have a lower deficit to fund, we’re going to have lower financing needs, and as we take on less debt, we have to issue less in the coming years because the debt service is less.”
The government will announce new figures for its financing program by the end of June, Suarez said. Colombia plans to auction 18.4 trillion pesos ($10 billion) of bonds in the local market this year, according to the plan announced in December.
Accelerating economic growth and rising foreign direct investment are bolstering tax revenue and making the government less reliant on credit markets. Colombia’s central bank forecasts South America’s fourth-biggest economy will expand as much as 6 percent this year, driven by consumer demand even as turmoil in Europe hurts global growth.
Tax collection rose to 21.9 trillion pesos in the first quarter, 3.4 trillion pesos above the target, according to the government. Revenue may rise to as high as 103 trillion pesos this year, tax agency director Juan Ricardo Ortega told lawmakers yesterday, higher than the government’s initial target of 88 trillion pesos. Tax collection surged 25 percent in 2011 to 83.7 trillion pesos.
The central government budget deficit this year may be 2.4 percent of gross domestic product, below the 2.6 percent of GDP target, Finance Minister Juan Carlos Echeverry said April 27. The budget deficit narrowed to 2.8 percent last year.
The yield on Colombia’s 10 percent peso-denominated debt due in July 2024 fell two basis points, or 0.02 percentage point, to 7.16 percent, according to the central bank.
Colombia’s local peso bond curve is too steep compared to peers in Latin America including Mexico, Chile and Peru, said Suarez, who was chief investment officer in pension fund Porvenir SA for six years before joining the Finance Ministry.
While the extra yield investors seek to hold Colombian dollar bonds instead of U.S. Treasuries is similar to the spread in Mexico or Peru, local market yields “are higher than we’d like,” said Suarez.
“If the local market incorporated the credit risk outlook observed in the international market, we should see a flatter local curve,” Suarez said. “It should continue to flatten given the positive fiscal outlook and stable inflation expectations.”
The gap between yields on Colombian government fixed-rate peso bonds due July 2024 and April 2013 is 181 basis points, or 1.81 percentage points. That compares to the 166 basis point gap for similar-maturity fixed-rate debt in Mexico.
The extra yield investors seek to hold Colombian dollar bonds instead of U.S. Treasuries is 190 basis points, according to JPMorgan Chase’s EMBIG index. That compares to 226 basis points in Mexico, 193 in Peru and 172 in Chile.
The economy’s 5.9 percent growth last year was the fastest since gross domestic product jumped 6.9 percent in 2007, the most in three decades. Colombia expects foreign direct investment to rise to $16 billion this year, up from a record $13.2 billion in 2011.
‘Coordinated’ Debt Issuance
The government will coordinate with the central bank should policy makers decide to issue debt to reduce liquidity in the market, Suarez said.
The central bank can issue bonds to lower the amount of local currency, according to a resolution published on its website April 30. The statement came after Banco de la Republica announced the bank will buy a minimum of $20 million daily in the spot market until at least Nov. 2, extending the program by three months as officials seek to ease the peso’s gains. The central bank hasn’t said if it plans to issue bonds.
The peso dropped 0.7 percent to 1,806.10 per U.S. dollar, paring its rally this year to 7.3 percent, still the best performance among all currencies tracked by Bloomberg.
“We will have a coordinated issuance policy” should the need arise, Suarez said. “Our objective is that the bonds that the government issues for its financing needs don’t compete with notes for monetary control.”
The Finance Ministry in February suspended auctions of its short-term notes, known as TCOs, for the first half of 2012 as increased cash holdings reduced the need for liquidity. Suarez didn’t say if the government will issue TCOs in the second half of 2012.
Colombia may issue inflation-linked peso bonds, known as TES UVR, due in 30 or 40 years in 2012 following requests from investors for the securities, Suarez said.
“We don’t have a specific need but, if there is demand from the market and it’s at an adequate cost to the nation, we are open” to offering the debt, Suarez said. It would be a one-time sale and would be included as part of the 18.4 trillion pesos of debt auctions planned for this year, she said.
The government will issue new TES UVR securities in the second half of the year as part of its plan to have benchmark fixed-rate bonds, known as TES, due in five, 10 and 15 years and benchmark inflation-linked securities due in five, 10 and 20 years, said Suarez. Colombia this month issued new 7 percent TES due May 2022 which will become the 10-year benchmark bond.