The Colombian corporate bond market is practically closed. Only two companies have sold debt this year, borrowing just $292 billion ($70 million). That represents 85% less than in the same period of 2022, according to data from the Colombian Stock Market, and a steeper drop than the 16% drop in issuance observed in Latin America during the same period.
“We have never seen it so pronounced but we have never had so many crashes at the same time”said Nicolás Mayorga, director of issuers, analysis and research at the Colombian Stock Exchange.
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The lending crunch is partly explained by one of the region’s most stubborn bouts of inflation, which remains high after a year and a half of interest rate hikes. Even though consumer prices are at their peak, Helping investors be bullish on other assets, companies are not expected to return to the market any time soon.
Issuers — and investors — are also pulling away from the market amid a turbulent political period after a year of the country’s first left-wing presidency, under the leadership of Gustavo Petro. As his administration faces a growing scandal, Petro continues to push through controversial reforms, including limiting the role of private pension fund managers — some of the biggest buyers of corporate bonds.
“It’s not so much that companies want to or don’t want to,” said Luis Carlos Sarmiento Gutiérrez, chief executive of Colombia’s largest banking conglomerate, Grupo Aval. “If it is not the cost that it would represent for them to go out and place substantial debt issues, and it is that this cost would be so high or suddenly it could not even be placed because there is still uncertainty abroad and everyone is waiting to see how these issues end. reforms”.
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Colombian peso and US dollar.
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The decline began last year and deepened when Petro, who took office in August, announced ambitious social programs and policies aimed at lifting millions of people out of poverty. Investors feared that his agenda would pile up debt and hurt the currency.
The Colombian peso hit record lows and yields on local government bonds, known as TES, rose above 15% in October.
One of the two companies that hit the markets this year was a vehicle finance firm, Finanzauto SA, which took out a loan of around US$15 million in bonds maturing in two years, with rates of up to 17%.
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More recently, investors have welcomed signs that the Petro’s agenda could unravel.
Dollar-denominated bonds have rallied since late May, when a scandal involving allegations that authorities misused wiretaps and polygraphs led to the resignation of Petro’s chief of staff and a campaign finance investigation. Since then, congressional debates on key reforms have lagged or failed to garner the support needed to move forward.
The Colombian peso has appreciated more than 15% against the US dollar this year, making it one of the best performing currencies in the world.
The respite has not yet reached the local bond market. Many companies are putting off plans to sell debt because of the debacle and persistent inflation. The Banco de la República, in two years, raised interest rates to the highest level in almost 25 years. Inflation remains above 12%, although it is moderating in other Latin American countries.
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Investment.
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The Government recognizes that the local market has gone “withering away” and is working hand in hand with the Stock Market on measures to stimulate liquidity, said the director of Public Credit, José Roberto Acosta, in an interview from New York.
Petro’s proposal for the pension system seeks to encourage more contributions from workers to the public pension system, effectively reducing flows to the private funds that hold about a quarter of the 75 trillion ($18 billion) of outstanding corporate debt. The public system does not invest in securities.
Arnoldo Casas, a fund manager at Credicorp Capital, which handles peso-denominated corporate bonds, said the market will get a boost when interest rates start to fall. But for now, the market is illiquid as private pension funds and insurance companies are the main buyers. “The issue that I see as complicated is the uncertainty regarding the pension reform”he commented.
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Meanwhile, other parts of the Petro reform agenda, such as plans to ban new oil drilling, have a direct impact on the economy. The Ministry of Finance estimates that the gross domestic product will expand by 1.8% this year, compared to 7.3% in 2022.
“I think that the political thing that has influenced has been two things. First, the energy transition, since the performance of the economy depends on it”said Juan David Ballén, a strategist at Casa de Bolsa in Bogotá. “And second, because of the pension reform, since pension funds are today one of the main investors in the capital market”.
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