A cement truck during construction at the Paraíso Central housing project in Cali, Wednesday January 5, 2023. Jair F. Coll (Bloomberg)
While the dollar’s course is fluctuating like a pinball between ranges that range between 4,800 and 5,000 Colombian pesos for each green bill, news about foreign investor confidence in the country is not encouraging at the moment. The Emerging Markets Bond Indicator (EMBI), one of the indicators that measures Colombia’s risk premium (the spread between Colombian government debt and US government bonds, which are considered safer), rose to 417 basis points this week, its highest level since last November 22 year, still at a high level.
The risk premium over the United States, the additional cost that the country has to pay to place its 10-year bonds in the market over that country’s, is very high. Colombia is paying more than 900 basis points (or 9%) more than the North American country, when that figure was little more than 800 and quickly fell to 400 in the panic early in the pandemic. In the past 12 months, it’s up 181 points and at times surpassed 1,000.
In short, the message about the solvency of the Colombian economy is that it is bad. One of the factors that the EMBI indicator, invented by US bank JP Morgan, takes into account is the likelihood that the country will default on its external debt. Financial specialist Sebastián Arango points out that this increase is due to “a higher risk perception regarding Colombian sovereign debt, leading foreign investors to demand a higher yield to invest”.
So it’s a kind of thermometer that serves to measure the temperature of the economy. When risk fever rises, for example due to political or societal factors, uncertainty acts as a shock wave, translating into higher bond yields and enticing skeptical investors to invest in Colombia. “If this trend continues, it will become increasingly expensive to attract investors, they will charge higher premiums each time, and the way is open for speculators to bet on places with higher prices,” says Arango.
Within the EMBI, which analysts follow daily on EKG-like graphs, other probabilities are also factored in, such as privacy’s ability to manage debt should the manufacturing sector hypothetically collapse. Financial adviser Marcela Machado reminds that runaway inflation and the loss of confidence due to the uncertainty created by the Petro government’s reforms and proposals have been a very heavy rock when it comes to passing country risk rating exams.
Dayana Herrera, also an analyst, adds that the prospects of drastic changes in sectors such as hydrocarbons, public services or infrastructure have scared financial markets. Machado points out that Colombia has financing needs that will be met with external debt and this is where the devaluation of the peso comes in: “With a currency so volatile and devalued over time, the cost of the country’s debt increases and with it the chances of the… default.
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As of November last year, when the latest calculations were released, external debt accounted for 52% of Colombia’s gross domestic product (about $178,136 million), almost reaching the all-time high of 54.8% in November 2020.
Another indicator of support for assessing the risk of investing in a country, the CDS (Credit Default Swaps in Spanish), has also risen. It is a type of financial insurance taken out to protect against a state defaulting on its government debt payments. Again, you pay more when the risk is higher, and that cost hit 429 basis points last November, the highest since March 2009.
The CDS, which are measured at 10 years, are also used to assess the risk of a country. The current score corresponds to the level of countries that are one or two notches below Colombia’s creditworthiness, according to Herrera. Also remember that Brazil, although it has a lower credit rating than Colombia, has a lower risk premium. The formula for the rebound, the experts repeat, boils down to two elements: legal certainty and reliable political management.
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