Colombia preparing for peso fall, bond rate rise
February 10, 2014
Foreign investors have continued buying Colombian-peso denominated government bonds, despite a weakening currency, says Michel Janna
Colombia is gearing up for a weakening of its currency and higher borrowing costs as the US Federal Reserve lifts its quantitative easing program, the country’s director of public credit told LatinFinance.
Source: Speaking Latino
The Andean country filled its bond needs for 2014 when it issued a $2bn 30-year bond in late January taking advantage of tighter spreads and high demand from investors. But Michel Janna said that things were getting tougher for Colombia and other Latin American countries as capital markets are turning volatile.
“We’ll probably have a higher interest rate, higher financing rates than the ones we have enjoyed in the past few years … but this is a new equilibrium, a new reality and we have to be ready for it,” he said.
He also warned that the local currency is coming under pressure as a result of the Fed’s efforts to tighten monetary policy, which could deter investors from the peso-denominated TES bonds.
“It’s true that with the end of QE we’ll probably have a higher exchange rate than last year,” he said, adding that he still expected the exchange rate to stay between 1,950 and 2,100 COP per dollar, a range that finance minister Mauricio Cardenas has described as “desirable”.
The Colombian peso has weakened nearly 6.2% this year, according to Central Bank data, and closed at 2,046.6 on Friday.
However, Janna said Colombia saw a 1% increase in foreign holdings in its local bond market in January, a month in which foreign investors pulled billions of dollars from EM funds
Colombia’s success in the capital markets, he said, is due to its fundamentals, including good economic growth, low inflation and recent rating upgrades.
“That creates a suitable environment for investors, who see Colombia as an emerging market that is different from the other emerging markets that are having problems,” he said. LF