Colombia Local Debt Selloff Turns to Rally on Oil Surge

Higher oil prices driven by the Iran war sparked a rally in Colombia’s local debt this week, converting it from the worst performing in emerging markets to the leading gainer as the price of its main export surged more than 20%.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — Higher oil prices driven by the Iran war sparked a rally in Colombia’s local debt this week, converting it from the worst performing in emerging markets to the leading gainer as the price of its main export surged more than 20%. Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.The jump in crude prices took a toll on other risk assets, which tumbled this week as investors flocked to safe havens. But for Colombia — where about a quarter of exports comes from oil — it helped offset traders’ sour mood over a growing fiscal deficit and upcoming presidential elections. “The situation in Iran has two major initial impacts: risk aversion and higher oil prices,” said Andres Pardo, head of Latin America strategy for XP Investment. “The first is bad for emerging markets. But oil helps countries like Colombia.”Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.It couldn’t have come at a better time for the administration of President Gustavo Petro, which is tapping local markets more aggressively than expected to face mounting spending needs. Last month, the government sold nearly 20 trillion pesos ($5 billion) of additional debt in private placements, beyond the scheduled auctions, according to Bogota-based broker Corficolombiana.Leading GainsPeso notes led gains in the developing world this week, returning 1.4% in dollar terms, according to data compiled by Bloomberg, as the price of its leading export leaped to the highest since April 2024. Before then, it had been the worst performing in emerging markets this year. The rout had worsened last week when a poll showed leftist candidate Ivan Cepeda ahead by a large margin, pushing yields on some of the shorter-dated bonds to record highs. But then came the war.Some investors want the government to use the opportunity provided by oil, which could prove short-lived, to push through spending cuts. Bonds would post a sustained rally if the jump in energy costs “is accompanied by an austerity plan, and not by increased government spending,” said Juan David Ballen, director of analysis and strategy at local brokerage Aval Casa de Bolsa.

Finance Minister German Avila has yet to present the plan detailing how the administration will finance its widening fiscal imbalance. Colombia posted a primary deficit — which excludes interest payments — of 3.5% of gross domestic product last year, the widest in at least 30 years outside periods of crisis.What’s more, economists surveyed by the central bank expect inflation to end 2026 at 6.33%, meaning the bank would miss its target for a seventh consecutive year. As a result, they expect policymakers to continue tightening monetary policy, raising borrowing costs to 11.75%. No other central bank in the Americas is expected to increase interest rates this year. Expectations of hikes have taken a toll on the short-end of the TES curve, with yields on the notes due in 2029, 2033 and 2035 rising to records. Colombians go to polls on March 8 to vote in Congressional elections and interparty primaries that will determine who joins Cepeda and security hardliner Abelardo De la Espriella on the first-round ballot. The country will hold presidential elections on May 31, with a potential runoff three weeks later.Recent surveys have triggered fears that the anticipated move to a more market-friendly government is unlikely. Polls show either an advantage for Cepeda or a technical tie with De la Espriella. Center-right, market-friendly candidates rank much lower in voting preference.“The election outcome presents a binary event risk,” JPMorgan economists led by Diego Pereira wrote in a note. “While no leading candidate is currently campaigning on an aggressive fiscal adjustment, markets appear more inclined to give the benefit of the doubt to a right-of-center opposition administration than to a candidate representing a continuation of the current fiscal expansion.”Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.