Bogotá — Just a year ago, Colombia lost its investment grade and was on the same rating level as Brazil. But, despite that downgrade, figures show that economic projections favor Colombia, but despite the good forecasts the country is seen as being exposed to more risks than Brazil.
The presidential elections have captured the attention of investors, as Colombia is about to choose between two anti-establishment candidates. On the one hand, the left-wing Gustavo Petro, and on the other, Rodolfo Hernández, a construction magnate who has been involved in several controversies during his political life.
Alejandro Di Bernardo, credit analyst in the fixed Income team at Jupiter Asset Management, spoke to Bloomberg Línea about the region, and, in particular, about how Colombia is perceived for the coming years.
He says that Colombia today pays a higher premium than Brazil despite the fact that its fundamentals are giving out better signals.
“It is interesting, because if we leave aside the political issue and look only at the macroeconomic view, Colombia’s CDS should be below Brazil, but what we saw this year is that this relationship was reversed and now Colombia pays around 20 basis points more than Brazil,” Di Bernardo says.
“If we look at the macro view, we find that Colombia has a lower level of debt over GDP than Brazil, and the country will see higher growth and in fundamental terms it will be better than Brazil this year, so many of the spreads we see reflect the nervousness about the election,s and the future will depend on what happens with that,” he adds.
The analyst also says that this is a particularity that Jupiter AM has been seeing in the region.
“In Latin America we see three main trends: The anti-system vote, and which is happening right in the post-Covid era; we saw it in Chile, we see it in Argentina, in Peru and now in Colombia. Secondly, the polls do not necessarily reflect what is going to happen, and that often occurs because voters make decisions just days before going to vote, so there are large proportions of blank votes, and that makes the opinion polls and the final result differ greatly.
And thirdly, we are seeing fragmented congresses. In the past we had traditional parties and today there is a fragmentation of government, and that is what generates uncertainty and political volatility, and that is reflected in the spreads,” he says.
Despite this, Di Bernardo assures that the projections for Colombia, for now, are positive.
“Latin America’s average growth will be 2% despite the rise in raw material prices. This time around, unlike in the past, it is not due to higher demand but to lower supply. However, we estimate that Colombia will grow around 5%.”
He adds that, in spite of the uncertainties in Colombia, and in general in the region, the electoral result will not be enough to improve or worsen the perception of the country, but rather analysts will wait to hear the plan of the next president.
“What we believe is that, in the region, we need to see political stability and a credible long-term plan. You need a macroeconomic plan, and what you want is to see long-term sustainability of your debt, that is what we are interested in as bondholders, to see debt levels stabilizing,” says Di Bernardo.
And he says that, for the immediate future, the outlook is stable.
“Whoever wins, Colombia’s macroeconomy will be better in 2022 than in 2021, but we need to see a long-term macroeconomic plan, and that plan should take into account the fiscal part, a reduction of the deficit, and improvements in investments, so that growth is sustainable and not only because of commodity prices,” he says.
Although the Colombian government has said that in the short term a fiscal reform is not required, the Jupiter analyst says that “in the long term, Colombia needs a fiscal reform because the deficit level requires a reduction, we believe that in 2022 it will be reduced due to the price of raw materials, but after 2022, and toward 2023 and 2024, we will have to see a concrete deficit plan”.
And finally, regarding the central bank’s interest rates, he says that, “as long as inflation in Colombia remains at high levels, the Bank of the Republic will have to continue raising rates, while other countries such as Brazil and Chile are going faster. We expect the rate to reach 8%, but all this has to be reflected in lower inflation”.
Translated from the Spanish by Adam Critchley