Colombia: Paid to Worry
Colombia is not an easy sovereign to market. Public finances are stretched, inflation remains above target, the government has made a habit of sparring with the central bank and Ecuador has just raised tariffs on Colombian imports to 100 per cent from 1 May. On one view, that is a clear case for caution. On another, it is simply what value often looks like.
The macro backdrop is hardly flattering. Growth is positive rather than strong. The fiscal position is poor. Policy under Gustavo Petro has become noisier, not calmer. The rows with the central bank have not helped, nor has the sense that Colombia is becoming a more abrasive presence, both at home and in the region, at exactly the wrong moment. With an election approaching, there is no shortage of reasons for investors to sound nervous.
Yet the bonds tell a less gloomy story. Colombia’s 2061s have returned 21 per cent over the past year, against 11.5 per cent for the Bloomberg EM Global Aggregate. That is a strong return for a sovereign supposedly weighed down by fiscal slippage, political noise and election risk. However awkward the headlines, investors have not exactly suffered for owning the debt.
That matters because sovereign investing is not a test of moral approval. The question is not whether Colombia looks tidy. It plainly does not. The question is whether the spread more than pays for the untidiness. In Colombia’s case, there is still a fair argument that it does.
The 2061 bond trades around 220 basis points over. That is no longer distressed territory, but neither is it tight, particularly when set beside US BBB investment-grade credit at about 105 basis points. The comparison is not exact, but it is still telling. Sovereigns and corporates are not the same sort of risk. A sovereign has tax-raising powers, policy flexibility and, in a meaningful sense, a permanent life. A corporate has maturities, margins and a limited franchise. If investors are willing to accept barely more than 100 basis points for lower-tier US investment grade, they are not being paid much for disappointment. At 220 over, Colombia still offers proper compensation.
That looks more interesting still when set against Moody’s Baa3 rating. Colombia is no star. On a net foreign assets screen it earns three stars, which is better described as adequate than admirable. But it passes our net foreign asset analysis which screens out the weak credits. That matters. The country does not need to look pristine to justify tighter spreads. It needs to look durable enough externally, liquid enough financially and cheap enough in spread terms to make the risk worthwhile.
None of this is to pretend the problems are invented. The budget is under strain. Inflation remains sticky. Petro’s energy agenda has made investors uneasy about the future revenue base. The government’s instinct for drama can make ordinary policy disputes feel more alarming than they need to. All true. But there is a difference between poor optics and imminent trouble. Colombia still has institutional depth, market access and room to adjust.
That is the more constructive reading. Colombia is not a bond to own because it is safe. It is a bond to own because the market may still be paying too much for the privilege of worrying about it. The easy story is that Petro has made the country riskier. He has. The harder question is whether spreads already more than reflect that. Even after a strong run, they may well do.
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