Colombia’s local bond yields will fall to a record low relative to overseas debt if Congress passes a bill to reduce a levy on foreign investors’ bond profits, Public Credit Director Maria Fernanda Suarez said.
The yield differential between peso bonds sold domestically and abroad will narrow by about 1 percentage point should the measure be approved, Suarez said in an interview from her Bogota office today. Colombia’s local notes due in 2024 yield 1.97 percentage points more than similar-maturity international debt, up from a record low 1.28 percentage points on Oct. 12.
The government is proposing cutting the tax on foreigners’ bond profits to 14 percent from about 33 percent in a bid to lure more overseas investors to the debt market and lower local borrowing costs. The new law would also exempt returns derived from currency gains. Colombia will continue to buy dollars in the foreign-exchange market to help offset an appreciation of the peso sparked by a surge in foreign investment if the law is approved, Suarez said.
“The yield differential shows us there is an unsatisfied appetite from foreign investors in entering the peso curve,” Suarez said. “At least half of the spread can be attributed to the complexity of the current tax structure, to that red tape. You would expect that spread to fall by at least 50 percent. There are mechanisms to contain the temporary currency effects.”
About 3 percent of the local government bonds, known as TES, are currently in hands of overseas investors, Suarez said.
Colombia will continue to purchase the greenback for its oil stability fund, where 20 percent to 30 percent of royalties are saved in dollars, according to Suarez.
Finance Minister Mauricio Cardenas has said the fund will end the year with $1 billion in dollar holdings, compared with $500 million at the end of September.
Trading volume in the local debt market has dropped this month after Interbolsa SA’s brokerage said Nov. 1 it couldn’t meet a loan payment, leading Cardenas to announce Nov. 7 that regulators will liquidate the company. Interbolsa, the nation’s biggest brokerage, was also part of the finance ministry’s market-makers program.
Trading volume, which is typically low in December, will likely rebound in January, Suarez said.
“A situation like we had with Interbolsa created levels of uncertainty much higher than what we had previous to the event,” Suarez said. “The reading I have is that a lot of bank treasuries and many institutional investors have said for now, ‘I’ll stay put.’ I’d expect a recovery at the start of 2013.”