Colombia’s bondholders have become Latin America’s biggest losers as rebel attacks on oil sites imperil production and the government plans more debt sales.
The nation’s peso-denominated notes have fallen six times the emerging-market average since June 16, when sabotage by Marxist guerrillas, community protests and environmental delays prompted Colombia to reduce the oil-output estimates in this year’s financing plan. The 1.4 percent bond loss coincides with the Finance Ministry’s decision to raise its budget deficit projection and boost local debt auctions by 1 trillion pesos ($531 million).
While the price of Colombia’s biggest export is surging to a nine-month high, investors are growing more pessimistic over the nation’s creditworthiness as oil production decreases. Finance Minister Mauricio Cardenas said last week that crude output is his “biggest worry.” The revised financing plan called for a 2014 budget deficit of 2.4 percent of the economy, wider than previously forecast.
“It’s a very challenging situation for Colombia,” Nader Nazmi, a Latin America economist at BNP Paribas SA, said in a telephone interview from New York. “The financing plan acknowledges that some of the targets for oil production were just too optimistic. They are going to have fiscal challenges.”
The increased bond issuance is unrelated to crude production and will enable the government to hold greater levels of cash by year-end, the Finance Ministry said in an e-mailed response to questions.
Yields on Colombia’s benchmark peso bonds due 2024 rose 0.28 percentage point in the two days following the revised sale plans, the biggest increase in a year, to 6.59 percent. Yields were at 6.5 percent on June 20. The peso has weakened 0.1 percent since the revised oil forecast was announced through yesterday, contributing to dollar-based losses for investors.
Colombia will auction 19.3 trillion pesos of peso bonds in the domestic market this year, up from a previously planned 18.3 trillion pesos. The peso slipped 0.3 percent today to 1,889.7 per dollar as of 2:54 p.m. in New York.
There were 57 attacks on Colombian pipelines in the first five months of this year, according to Ministry of Defense data. The Cano Limon-Covenas pipeline, Colombia’s second largest, restarted operations May 25 after a two-month shutdown following rebel attacks.
Security forces and engineers from state-controlled oil producer Ecopetrol SA were prevented from fixing the pipeline by the forest-dwelling Uwa indigenous group, who say their reserve has been polluted by oil spills.
The two-month standoff cut production at Ecopetrol by more than two million barrels as storage space ran out. Cano Limon suffered a fresh attack with explosives last week, halting transportation.
Colombia’s Finance Ministry cut its forecast for oil production to 981,000 barrels per day in the June 16 report. Output was 1,006,000 barrels per day in 2013. The government also cut the dividends it expects to receive from Ecopetrol in 2015 by 22 percent. Oil accounts for more than 50 percent of Colombian exports.
“This is the big obsession,” Cardenas told Caracol Radio on June 20. “If we don’t maintain this pace of oil output for whatever reason, because of terrorist attacks, problems with environmental licensing, or social unrest, this will affect all Colombians.”
Government negotiators have held peace talks with members of Colombia’s largest rebel group, the Revolutionary Armed Forces of Colombia, or FARC, since November 2012. The two sides have reached agreement on three points on a six-point agenda.
Colombia’s second-largest oil producer, Pacific Rubiales Energy Corp., said shutdowns at the Bicentenario pipeline curbed revenue in the first quarter.
While security issues have hit production this year, foreign direct investment into Colombia’s oil industry will bolster output in coming years, said Andres Pardo, the head analyst at Corp. Financiera Colombiana.
“It’s a good sign that foreign investors haven’t given up,” Pardo said in a telephone interview from Bogota. “As long as there’s money financing exploration there’s a chance Colombia will make oil discoveries.”
The government will need to find new sources of revenue, including a new tax reform, to address the fall in oil income, said Alejandro Reyes, the head analyst at Ultrabursatiles brokerage in Bogota.
“The trend in oil-sector income presents a real risk,” Reyes said in a telephone interview.