The Coming Bond Deluge Shows Oil-Swoon Pain Not Over in Colombia

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Investors are bracing for a deluge in Colombia’s bond market.

Finance Minister Mauricio Cardenas gave them reason to worry last week when he said the nation has the ability to take on more debt as oil revenue dwindles. The comment, coming before the government releases an update to its financing plan on Friday, is fueling speculation that Colombia will boost local debt sales to the most in at least 15 years.

The looming glut and concern the nation’s finances are deteriorating have now caused its borrowing costs to soar to the highest in five months. Colombia, which relies on oil exports for about 17 percent of revenue, will see its budget deficit widen to a six-year high of 3.5 percent of gross domestic product in 2016, according to Credicorp Capital.

“There aren’t many more options besides selling more bonds” next year, Francisco Chaves, the head analyst at Corredores Davivienda brokerage, said by telephone from Bogota.

The Finance Ministry didn’t respond to an e-mailed request for comment on bond issuance plans.

Yields on Colombia’s benchmark peso bonds due in 2024 have jumped 0.17 percentage point to 7.11 percent since Cardenas said June 2 the country can increase its debt load over the next four years. That’s five times the average yield increase for emerging-market countries. The peso fell 0.2 percent to 2,531.98 per dollar at the close in Bogota.

Colombia already plans to sell 31.75 trillion pesos ($12.6 billion) of debt this year in the local market, which would be the most since at least 2001, the most recent year for which the Finance Ministry has data on its website.

‘Pretty Simple’

The government may increase domestic debt sales by as much as 5 trillion pesos in 2016, according to Munir Jalil, the head analyst for Citigroup Inc.’s Colombia unit. It may also boost issuance for this year by as much as 4 trillion pesos, he said.

“The math is pretty simple,” Jalil said by telephone from Bogota. “The tax collection target is in jeopardy, and if you’re not filling the gap with taxes or further spending cuts, you’re going to have to do it by issuing more.”

Cardenas said in a presentation Thursday that the government targets a budget deficit of 3 percent of GDP this year, up from the 2.8 percent forecast in December.

Oil Estimate

On Friday, Colombia will also update its long-term oil forecast from the $97-a-barrel projection it made in 2014. The so-called Fiscal Rule Committee, which establishes long-term oil forecasts that are used as a basis for the financial plan, sees the Brent long-term oil price at $85.6 per barrel in 2015 and $81.5 in 2016, Cardenas said. Brent crude prices traded at $65.04 a barrel Thursday.

The country may have to sell more debt overseas next year, Jalil said. It issued $2.5 billion abroad in 2015 after selling $1 billion in October to fund this year’s budget.

The nation’s dollar bonds are slumping, posting a 3.4 percent loss this year that is the biggest among developing nations, data compiled by Bloomberg show.

“Colombia has suffered a very large terms-of-trade shock that is leading to significant uncertainty on the fiscal front,” said Alejo Czerwonko, a strategist at UBS Wealth Management, which oversees $1 trillion including Colombia bonds. “That extra supply isn’t credit-positive.”

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