Colombian Assets Extend Drop as Peace Vote Springs Credit Risk

  • Peso drops second-most in emerging markets on political risks
  • IMF trims growth forecasts after Colombians reject peace deal

Colombia’s peso deepened the world’s worst decline this week while bonds slid for a second day as a thwarted peace accord vote fueled skepticism the government will deliver key tax reforms to maintain its credit rating.

The currency weakened 1.5 percent to 2,976.34 per dollar at the close of trading in Bogota, extending its two-day loss to 3.2 percent, after the International Monetary Fund cut Colombia’s growth outlook for this year and next.

Political upheaval caused by the vote and its aftermath will likely delay tax reforms that President Juan Manuel Santos promised to bring before Congress this month and pass by year’s end, according to Bank of America. After Sunday’s razor-thin defeat, Santos ordered negotiators to return to Cuba and include former president Alvaro Uribe, who actively campaigned against the peace deal, in discussions,  to some a sign of political weakness. Colombia’s head of public finances told local radio Tuesday that the peace vote won’t affect the tax reform. Investors aren’t convinced.

"Everything that smells of President Santos is highly polemical," said Cesar Sanchez, the vice president of fixed-income sales at broker Ultralat in Miami. Still, he says Colombia is a safe investment in the long run, and opportunistic investors may see buying opportunities amid the selloff.

Yields on Colombia’s local-currency bonds due in 2024 climbed 0.06 percentage point to 7.07 percent while the yield on $1.5 billion of overseas notes due in January 2026 rose 0.12 percentage point to 3.41 percent. Colombian investor anxiety, as measured by one-month implied volatility on the currency, has increased 1.3 percentage point since Friday to 18.4 percent, the third-highest in the world.

Colombia is at "high risk" of a ratings downgrade to BBB-, according to Bianca Taylor, senior sovereign analyst at Loomis Sayles & Company in Boston. She says Santos’s failure to win support for the peace deal makes unpopular tax measures even more improbable.

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 companies currently rate Colombia at the second-lowest investment grade.

"Are the legislators and congress willing to pass this now?" she said. "I’m not sure being downgraded to BBB- is a big enough stick for them to care about pushing this through."

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