Colombia’s bid to engineer a 10 percent devaluation of the peso is prompting the government to scale back foreign borrowing and rely on the local bond market for financing.
The Andean nation will sell less overseas debt when existing bonds come due as part of an effort to “take out” dollars from the economy, Finance Minister Mauricio Cardenas said this week. Colombia will mainly turn to the local market, where it can pay about 0.13 percentage point less to borrow in pesos, based on currency-swaps trading. Relative borrowing costs are the lowest since May.
Colombia is stepping up efforts to curb the peso’s 26 percent gain against the dollar since 2008, which has hurt exporters’ profits and fueled the highest joblessness in Latin America. With the inflation rate falling to an almost three-year low and the region’s lowest benchmark interest rate at 4 percent, Alejandro Salamanca, a debt strategist at Serfinco brokerage, says that Colombia will be encouraged to borrow locally and reduce its dollar-denominated debt from its level of about $27 billion.
“As it sees local peso borrowing costs get cheaper, the government will have more of an incentive to issue locally,” Salamanca said in a telephone interview. “It also helps their policy of curbing the peso’s appreciation.”
Overseas borrowing, “original sin”
Colombia’s bid to reduce its dollar-denominated obligations and turn to local markets moves the country further away from the reliance on foreign debt that led nations across Latin America to default in the 1980s. That dependence on overseas borrowing has been dubbed the “original sin” by Harvard University professor Ricardo Hausmann.
Colombia would pay about 13 basis points, or 0.13 percentage point, less to borrow in pesos than to sell bonds in dollars and swap the proceeds back into local currency, according to Bloomberg calculations using the country’s 2021 dollar bonds and the 2022 peso bonds.
That’s the biggest discount since at least May, when the 2022 bonds were issued. On average it has been about 76 basis points cheaper to sell bonds in dollars over that period.
“Buying debt or paying down debt abroad is a way of taking dollars out of the economy, so there won’t be so much pressure for the peso to appreciate,” Cardenas said in an interview on National Radio. “We want borrowing to be essentially in pesos, to be able to pay off debt in dollars.”
Governments across the Andean region are paring back overseas borrowing to limit currency gains that threaten to make local industries less competitive globally.
Peru last month announced a $2 billion plan to pay off foreign loans early after the sol reached a 16-year high against the dollar, even after the central bank bought a record $13.9 billion in the spot market in 2012.
In Chile, the government pledged to keep all the revenue from a $1.5 billion dollar bond sale in October outside the country.
Colombian 10-year dollar debt yields 2.96 percent, compared with 3.25 percent in Peru and 2.69 percent in Chile for similar maturities.
In its 2013 financial plan, the government said it would sell 30 trillion pesos ($16.7 billion) of bonds in the local market this year, of which 23 trillion pesos will be raised through bond auctions, and sell $2.6 billion of bonds overseas. The government may change this ratio to take advantage of lower local yields, said Mario Castro, a Latin America strategist at Nomura Holdings Inc. in New York.
“The government got local borrowing costs to cheapen, and it makes sense for them to use this,” Castro said. “It wouldn’t surprise us if they issued less overseas than they announced in their financial plan.”
Colombia has $1.5 billion of external debt slated to amortize this year and $2.2 billion in 2014, according to a report on the Finance Ministry’s website. The country won’t prepay its overseas bonds or multilateral loans, Cardenas told reporters.
The peso has risen 8% since the start of 2012
The peso has risen 8 percent since the start of 2012, the sixth-biggest gain among more than 150 currencies tracked by Bloomberg. The central bank on Jan. 28 said it would boost dollar purchases to at least $30 million a day and will buy at least $3 billion between February and May.
The peso’s rally has provoked complaints from coffee and flower growers and textiles manufacturers that say the appreciation is making it harder for them to compete.
Colombia’s borrowing costs abroad have risen in line with U.S. Treasury yields as traders bet the recovery in the world’s biggest economy is accelerating, Salamanca said.
The daily dollar purchases and the decline in dollar debt should help weaken the peso to its “equilibrium level” of 1,950 per dollar, Cardenas said Jan. 29. The peso depreciated 0.2 percent to 1,795.74 per U.S. dollar at 10:08 a.m. in Bogota.
While Cardenas’ plan may help prevent further peso appreciation, it is unlikely to produce a significant weakening, according to Camila Estrada, the head analyst at Helm Bank in Bogota.
“Not taking on new debt means they won’t generate additional pressure on the exchange rate,” Estrada said in a telephone interview. “If it had been to repay debt, that would have had a bigger impact.”
With the peso remaining higher than the government wants, President Juan Manuel Santos has pledged to use “all the weapons in our arsenal.” The government will continue to look for new ways to ease the pressure for the peso to appreciate, Castro said.
“We’re seeing the government pretty worried and trying everything,” Castro said. “Every day they’re seeing what they can do. They’re committed to it and if they don’t see a recovery in the peso, they’ll keep insisting.”