Cheap Colombia bonds reflect risk of Petro victory

In Colombia, the biggest question for investors right now is whether the country will elect its first leftist government this year, with Gustavo Petro as president, according to a group of financial professionals who spoke to Bloomberg.

Petro, 61, is leading the polls ahead of presidential elections in May and has stirred nervousness among bondholders with promises to end oil exploration and reform the Bank of the Republic to give voice to the “productive organizations” in the definition of monetary policy.

“The question is always whether the left will come to power”, said Mario Gómez, managing partner for Colombia of the Prospectiva risk consultancy.

Everything is still up for grabs and a victory for Petro is far from a fixed reality, according to Gómez. At this same stage during the last electoral race four years ago, Petro had a similar lead, while the eventual winner, Iván Duque, was ranked fifth in some polls, he said.

If the 30% of voters who are still undecided have not yet opted for the left or the right, they may well lean towards a centrist candidate, he said.

Gómez was one of three participants in “Mercado Speaks” conducted on February 23 by Bloomberg News, which also included:

• Carolina Monzón, Economist, Banco Itaú Colombia
• Arnoldo Casas, Director of Investments for Colombia, Credicorp Capital

“Very cheap”

Prices reflect political risk at the moment, but once elections are held, there could be opportunities for investors to buy cheap debt, according to Credicorp Capital’s Casas.

“I believe that after the electoral noise there are many assets that are undervalued, including debt”, said houses. “If one believes the Banco de la República that inflation is going to be below 5% in Colombia or converging to 3%, which is its goal, the assets are given away in this country.”

With oil and coal accounting for nearly half of exports, government bond yields have risen to their highest level since the COVID-19 pandemic sent credit markets tumbling two years ago.

But even if Petro comes to power, it will be difficult for him to go ahead with his proposal to end oil exploration, and he may even come to the conclusion that the government cannot afford to lose those revenues, Casas said.

If it tries to make good on this promise, spreads on Colombia’s long-term bonds will widen further, according to Casas. The short-term impact may be less pronounced as oil companies have contracts to exploit crude that has already been discovered, which the government must adhere to.

weak fundamentals

Itaú’s Carolina Monzón points out that polls show that, despite strong growth, Colombians are very concerned about the economy, unemployment and inflation, as well as corruption and the recent rise in crime.

“In 2021, the reactivation gained strength, but we also have to recognize that social discontent gained strength and there were strikes“, said.

Monzón sees the fair value of the Colombian peso at around 4,000 per dollar, slightly weaker than its current level of 3,927. Even beyond this year’s election, the nation’s fundamentals appear weak following the loss of investment grade, with a fiscal deficit double the pre-pandemic level, high debt levels, rising financing costs and a current account deficit forecast at 4.5% of gross domestic product this year.

Even if a market-friendly president is elected, the value of the peso will not suddenly rise due to the structural problems that are causing its devaluation, he said.

Congressional elections to be held on March 13 will be key in establishing the checks and balances for any government that comes to power. That same day, various political parties and movements will hold consultations, providing a clearer picture of who will be on the ballot for the presidency.