• JP Morgan says that mounting fiscal risks amid a challenging external backdrop put Colombian assets in a precarious position. They note that policymakers have struggled to return to the ~3% of GDP pre-pandemic fiscal deficits, with continuously weak tax collection, attempts to change the fiscal rule and the decentralisation law the key fiscal concerns at the moment.
  • Without any offsetting measures, the decentralisation law, which aims to increase transfers from the central government to the regions, could add 1.7%-pts of GDP to the fiscal deficit over the next decade. Discussions continue in Congress, but any version of the law that doesn’t include a transfer of spending responsibilities is likely to further jeopardise Colombia's fiscal outlook.
  • JPM says that a potential local currency downgrade to junk will be a key focus next year, with Fitch already at BB+ and S&P at BBB- with a negative outlook. They believe this could trigger $2.5-5bn in outflows from fixed-rate COLTES, representing around 3.5-6.5% of the outstanding stock. JPM anticipates further currency weakness, with COLTES already reflecting increased risk premium, in their view, and move UW COP while staying MW TES in their model portfolio.

COLOMBIA: JP Morgan Moves UW COP As Fiscal Risks Mount

Last updated at:Nov-14 14:30By: Keith Gyles
  • JP Morgan says that mounting fiscal risks amid a challenging external backdrop put Colombian assets in a precarious position. They note that policymakers have struggled to return to the ~3% of GDP pre-pandemic fiscal deficits, with continuously weak tax collection, attempts to change the fiscal rule and the decentralisation law the key fiscal concerns at the moment.
  • Without any offsetting measures, the decentralisation law, which aims to increase transfers from the central government to the regions, could add 1.7%-pts of GDP to the fiscal deficit over the next decade. Discussions continue in Congress, but any version of the law that doesn’t include a transfer of spending responsibilities is likely to further jeopardise Colombia's fiscal outlook.
  • JPM says that a potential local currency downgrade to junk will be a key focus next year, with Fitch already at BB+ and S&P at BBB- with a negative outlook. They believe this could trigger $2.5-5bn in outflows from fixed-rate COLTES, representing around 3.5-6.5% of the outstanding stock. JPM anticipates further currency weakness, with COLTES already reflecting increased risk premium, in their view, and move UW COP while staying MW TES in their model portfolio.

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