EM LATAM CREDIT: Colombia: Fiscal Deficit/Rates Higher – Negative

(COLOM; Baa3/BBneg/BB+neg)

• COLOM USD bonds have been rallying on buy backs and diversification of funding by tapping the Euro market. That has diverted attention away from concerns earlier in the year about rising fiscal deficits as we went from 4.2% in 2023 to 6.7% in 2024 to the govt. 2025 forecast of 7.1% and now Central Bank Co-Director Villamizar saying the fiscal deficit could be close to 8% this year. There has been a proposed tax reform bill, but the track record has not been good on passage of tax reform lately.

• We are at the tight end of the three-year range when looking at the COLOM 45s vs Brazil (BRAZIL; Ba1/BB/BB) 45s spread differential, last quoted at 53bp and ranging from 228bp in the wake of Petro getting elected President in 2022 to a tight of 21bp last month post the USD bond buybacks with an average of 94bp over the three-year period. Fundamentally we view Brazil as a much stronger credit.

• The primary fiscal deficit was forecasted to be 2.4%, so a large portion of the overall fiscal deficit will be interest on the debt. That interest cost was expected to decline with lower interest rates if inflation cooperated, but Villamizar is now saying he is concerned inflation has been above target for far too long and an interest rate hike is now a consideration.

• The latest CPI data reported about a week ago revealed a 5.18% YoY rate of inflation and 5.1% the previous month. The govt’s projection for CPI this year was 4.5% which is way above the target of 3%. The IMF projects 2025 inflation of 4.9%.

• The public credit director Cuellar has said the govt plans more USD bond buy backs funded with Euro issuance. Our concern would be the lack of Euro revenue to provide a proper asset/liability matching to avoid the currency risk. Out of the USD50bn of Colombia exports in 2024, about USD6bn was to Europe and the percentage of that denominated in Euros would likely be less as some exports such as oil may be denominated in USD.