Since the pandemic, and after the loss of investment grade that Colombia suffered in 2021, the rate risk of the country has been hit.
This Thursday, February 23, within the framework of the ‘Economic Outlook 2023 Meeting’, organized by Camacol, the co-director of Banco de la República, Jaime Jaramillo Vallejo, assured that throughout February the country risk of Colombia «shot up even more ”.
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This is evidenced by the credit default swaps, or CDSFinancial derivatives that function as a thermometer of how investors perceive a country’s credit default risk.
“Economists look at the external perception of risk with credit default swaps, they are financial operations that are basically an investor bet on the probability that a country will not pay. The higher the credit default swap, the higher the perception from outside that we can reach a default on Colombia’s debt,” Jaramillo explained.
According to the Issuer’s co-director, in mid-2021 Colombia was perceived to have a trend very close to that of Mexico, but after losing the investment grade it was equal to that of Brazil, which used to be lower, «and then, little by little , we have been moving away from the trend and in February the credit default swap has skyrocketed even more”, he assured.
According to Jaramillo, the importance of the CDS is that this defines the interest rate charged to Colombia, the Government and the private sector, in their external credits.
A report published yesterday by ‘Bloomberg’ also detailed that Colombia’s assets fell throughout the month due to the concern generated by the reforms promoted by the Government of Gustavo Petro such as the bill to modify the health system, and also its promises to reduce the role of pension fund administrators and a decree that will allow him to reduce energy rates.
According to the news agency, this translated into “a quick sell-off causing the country’s currency, bonds and stocks to fall sharply as investors weighed how far the leftist president will take his reforms.”
The costs of guaranteeing against credit default, or credit default swaps, increased this month more than those of any of its Latin American peers, the agency also indicates. And he pointed out that peso-denominated debt, which depends to a large extent on foreign buyers, has been the one that has registered the biggest drop in emerging markets.
According to Juan David Ballén, director of Analysis and Strategy at the brokerage firm Casa de Bolsa, it must be taken into account that CDS are a dynamic indicator, they change every day and have a global barrier, because when they increase it happens in all countries, and the same happens when they go down.
“The first month of the year was somewhat calm. However, the indicator remains above other countries. This additional risk premium that has been occurring since last year remains over time”, mentioned Ballén.
For the expert, there are some global factors that are causing the risk premium to rise, the lower global liquidity, such as the increase in rates or that central banks are no longer buying financial assets.
“There is a phenomenon that has also had an influence, the famous internal factor, since uncertainty has recently arisen in relation to the announcements of the Government, related to the pensions, health care reforms, the change in the rules of the game such as not increasing tolls or taking control of the regulation of public services. All this alters the panorama somewhat, generates some nervousness, and all of this is reflected in these types of indicators,” Ballén assured.
The expert also said that Colombia’s debt balance is “very high”, and that fiscal decisions after taxes and oil revenue point to other priorities.
Market perceives greater challenges ahead
Within the framework of the Camacol perspectives event, Juana Téllez, BBVA’s chief economist for Colombia, and Camilo Pérez, director of economic research at Banco de Bogotá, highlighted some risks facing the country.
“We believe that the interest rates of the deposit market are going to fall more slowly than they rose… also that the exchange rate is going to continue above $5,000, also due to political uncertainty, there are between five and ten reforms in the panorama”, assured Pérez, who reiterated that the economy is facing a scenario of uncertainty and concerns that may affect the vision of investors.
For his part, Téllez highlighted that the deceleration What is expected for the economy in 2023 will be tied to less job creation. «The perspective of a labor reform that we still don’t know about also generates uncertainty,» the economist showed.