Colombia looks to “take out” dollars from the economy

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Mauricio Cardenas - dollars

Colombia will sell less overseas debt when existing bonds come due as part of an effort to “take out” dollars from the economy, Finance Minister Mauricio Cardenas. (AP Photo/Michel Euler)

BOGOTA, Colombia — Colombia’s bid to engineer a 10 percent devaluation of the peso is prompting the government to scale back foreign borrowing and rely on the local bond market for financing.

The Andean nation will sell less overseas debt when existing bonds come due as part of an effort to “take out” dollars from the economy, Finance Minister Mauricio Cardenas said this week. Colombia will mainly turn to the local market, where it can pay about 0.13 percentage point less to borrow in pesos, based on currency-swaps trading. Relative borrowing costs are the lowest since May.

Colombia is stepping up efforts to curb the peso’s 26 percent gain against the dollar since 2008, which has hurt exporters’ profits and fueled the highest joblessness in Latin America. With the inflation rate falling to an almost three-year low and the region’s lowest benchmark interest rate at 4 percent, Alejandro Salamanca, a debt strategist at Serfinco brokerage, says that Colombia will be encouraged to borrow locally and reduce its dollar-denominated debt from its level of about $27 billion.

“As it sees local peso borrowing costs get cheaper, the government will have more of an incentive to issue locally,” Salamanca said in a telephone interview. “It also helps their policy of curbing the peso’s appreciation.”

Overseas borrowing, “original sin”

Colombia’s bid to reduce its dollar-denominated obligations and turn to local markets moves the country further away from the reliance on foreign debt that led nations across Latin America to default in the 1980s. That dependence on overseas borrowing has been dubbed the “original sin” by Harvard University professor Ricardo Hausmann.

Colombia would pay about 13 basis points, or 0.13 percentage point, less to borrow in pesos than to sell bonds in dollars and swap the proceeds back into local currency, according to Bloomberg calculations using the country’s 2021 dollar bonds and the 2022 peso bonds.

That’s the biggest discount since at least May, when the 2022 bonds were issued. On average it has been about 76 basis points cheaper to sell bonds in dollars over that period.

“Buying debt or paying down debt abroad is a way of taking dollars out of the economy, so there won’t be so much pressure for the peso to appreciate,” Cardenas said in an interview on National Radio. “We want borrowing to be essentially in pesos, to be able to pay off debt in dollars.”

Governments across the Andean region are paring back overseas borrowing to limit currency gains that threaten to make local industries less competitive globally.

Peru last month announced a $2 billion plan to pay off foreign loans early after the sol reached a 16-year high against the dollar, even after the central bank bought a record $13.9 billion in the spot market in 2012.

In Chile, the government pledged to keep all the revenue from a $1.5 billion dollar bond sale in October outside the country.

Colombian 10-year dollar debt yields 2.96 percent, compared with 3.25 percent in Peru and 2.69 percent in Chile for similar maturities.

In its 2013 financial plan, the government said it would sell 30 trillion pesos ($16.7 billion) of bonds in the local market this year, of which 23 trillion pesos will be raised through bond auctions, and sell $2.6 billion of bonds overseas. The government may change this ratio to take advantage of lower local yields, said Mario Castro, a Latin America strategist at Nomura Holdings Inc. in New York.

“The government got local borrowing costs to cheapen, and it makes sense for them to use this,” Castro said. “It wouldn’t surprise us if they issued less overseas than they announced in their financial plan.”

Colombia has $1.5 billion of external debt slated to amortize this year and $2.2 billion in 2014, according to a report on the Finance Ministry’s website. The country won’t prepay its overseas bonds or multilateral loans, Cardenas told reporters.

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Source: Matthew Bristow and Christine Jenkins/Bloomberg News

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