Bloomberg — A rate hike by Colombia’s central bank Friday aimed at calming markets won’t be enough to lure in investors after the most tumultuous week so far in Gustavo Petro’s presidency. For now, emerging-market money managers are waiting to see what the leftist president does next.
Following Petro’s surprise sacking of his finance minister Wednesday, investors are keyed in on a series of events starting Monday when the new minister takes office and the president addresses supporters, whom he’s called to the streets to back his controversial economic proposals.
“We prefer to remain on the sidelines in local assets at current levels, but we think that the latest cabinet shift should serve as a reminder that policy unorthodoxy risks in Colombia remain elevated,” Morgan Stanley strategists Lucas Almeida and Ioana Zamfir wrote in a note to clients Friday.
Markets recoiled after Petro shuffled his cabinet, with the peso weakening 3.9% last week, the most among more than 140 currencies tracked by Bloomberg. The cost to insure the nation’s debt against default and debt yields jumped. Only dollar bonds from distressed nations posted bigger losses.
The central bank responded on Friday with a quarter percentage point rate increase, which was met with limited response from investors ahead of a holiday weekend in the country. Local markets are closed Monday. For investors, the question now is whether the bank has done enough to tame one of Latin America’s stickiest bouts of inflation.
Annual inflation accelerated to 13.34% in March, even as it slows in other emerging markets.
Petro’s speech on Monday, when he swears in new cabinet members, has the potential to either calm investors’ nerves or extend the selloff. Analysts will also be looking for possible comments by incoming Finance Minister Ricardo Bonilla to gauge whether he’ll be a moderating influence on Petro as his predecessor Jose Antonio Ocampo was.
The week will be capped off Friday with the publication of the April inflation report, which will show whether the worst spike in consumer prices since 1999 is finally starting to cool.
Banks from Barclays to Credit Agricole and Morgan Stanley are predicting the end of the tightening cycle after Friday’s move, which was a coin toss for interest-rate swap markets and economists.
“Emerging-market central banks often have to respond to risk rather than the economy,” said Drausio Giacomelli, head of emerging-market research at Deutsche Bank Securities Inc. “I had a receiving bias, and I think it will come back if we don’t get another flare up.”
Petro is trying to transform Colombia’s economic model by increasing the state’s role in health care and pension provision, and giving workers more rights. But his ruling coalition fractured in recent days as key allies in congress deserted him and refused to back his controversial health-care reform.