Colombian Peso Leads World Losses as Tax Reform Seen in Jeopardy

  • Santos rushes to save peace talks after Colombians reject deal
  • Bonds, stocks also fall as vote muddies outlook for tax reform

Colombia’s peso posted the biggest drop in three weeks and bonds slid with stocks as the government’s failure to gain popular support for a peace deal fueled speculation it also won’t be able to deliver key tax reforms.

The currency weakened 1.7 percent to 2,931.17 per dollar as expectations for volatility surged, making it the world’s worst performer after citizens narrowly rejected a peace agreement between Colombia and Marxist guerrillas by 50.2 percent to 49.8 percent in a weekend ballot. The Colcap stock index slipped 0.6 percent to a seven-week low and the country’s local and overseas bonds both posted declines.

Investors took the ballot-box failure as a bad omen for President Juan Manuel Santos’s ability to push through tax increases designed to preserve the country’s investment-grade credit rating. If passed, higher value-added taxes would help cut the national deficit in half to 1.5 percent by 2020 and boost economic growth as much as 1 percent per year, according to the Finance Ministry. Now the administration may seek a smaller hike that would be more politically palatable, according to Sean Newman, a money manager at Invesco Advisers Inc.

"This was hopefully going to start a new chapter in the country’s history," said Newman, whose Atlanta-based firm oversees $800 billion of assets. "The fact that Santos lost this agreement certainly makes Colombia’s outlook much more challenging."

To read about Santos’s efforts to save peace process, click here

The president had pledged to put the bill before Congress this month and get it passed by year-end. S&P Global Ratings and Fitch Ratings have the country’s credit ratings on a negative outlook after low oil prices curbed government revenue.

“The tax reform is likely to get delayed, perhaps even until next year," Bank of America strategist Ezequiel Aguirre wrote in a note to clients, adding that "this will significantly increase the probability of a credit rating downgrade."

Moody’s Investors Service, which had expected the tax reform to pass this year, said the peace vote is negative for Colombia’s credit profile.

"The government had indicated that they would go through with tax reform no matter what, but we’re now in a different scenario," Moody’s analyst Samar Maziad said in an interview.

Yields on Colombia’s local-currency bonds due in 2024 rose the most in a year, climbing 0.19 percentage point to 7.01 percent after reaching a 15-month low last week. The yield on $1.5 billion of overseas notes due in January 2026 rose 0.09 percentage point to 3.29 percent. Colombian investor anxiety, as measured by one-month implied volatility on the currency, increased the second-most in the world since Friday to 17.8 percent.

Standard Chartered strategist Nick Verdi, the top Colombian peso forecaster in the third quarter, sees the currency weakening to 3,200 per dollar by year’s end as a delayed tax reform will counteract benefits from recovering oil prices.

"This vote reflects a lack of confidence in the administration’s ability to push through key parts of its manifesto," he said by phone. "If Colombia wasn’t able to get the peace accord passed, I struggle to see how Congress will approve the tax reform."

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