Colombia’s Struggles to Ink Peace Deal May Jeopardize Bond Gains

  • Fitch put Colombia’s rating on negative watch last month
  • Peace-accord delays may hurt tax bill needed to boost finances

Colombia’s inability to finalize a long-awaited peace deal with rebels is threatening to derail the nation’s bond rally.

The tentative agreement that would end five decades of fighting with the FARC still needs to be formally signed by both parties as well as approved by the public via a plebiscite. The delay is putting at risk a tax bill that President Juan Manuel Santos plans to send to Congress in October, which is badly needed to boost government revenue in the face of low oil prices. 

The lack of progress prompted Fitch Ratings to put Colombia’s rating on negative watch last month, and has Nomura Holdings and Corficolombiana warning of a potential surge in borrowing costs. Colombia’s bond yields have tumbled 1.6 percentage points this year, helping push returns on the debt to 20 percent amid a rebound in crude prices.

“In case the plebiscite is postponed or the government loses the plebiscite, it will have political effects that will harm the tax bill,” said Mario Castro, a strategist at Nomura. “Everyone is expecting the bill will be sent to Congress in October. Anything beyond that would set nerves on edge.”

Colombia is committed to raising taxes and reducing the fiscal deficit, Finance Minister Mauricio Cardenas said last month.

Nomura expects the tax bill to boost revenue by as much as 2 percent of gross domestic product. If the final outcome is below those estimates, “there is no doubt” it will have a negative impact on the country’s credit rating, Castro said. Colombia is rated BBB by Fitch, two levels above junk.

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