The economic uncertainty and the fear that exists in the market regarding whether or not the fiscal rule will be complied with this year and the next, finally began to take their toll on the risk perception of investors and other market actors, since at the same time It seems that local bonds are no longer so attractive and in order to sell them, The country is having to commit to paying higher interests.
This is noted in a recent report by the economic research team of the Bank of Bogotá, according to which, from mid-November to date, despite the fact that the country risk premium measured by the 5-year CDS (Credit Default Swaps) has corrected, local sovereign debt has deteriorated.
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This, after showing that between November 15 and December 16, While the CDS fell by -13 basis points to 192 points, the sovereign bond rate in local currency (TES) registered an average increase of +47 basis points.
“The scenario described is explained by changes in the demand for TES and in the issuance of these papers through mechanisms other than primary auctions, since on the one hand, it is observed that the challenging fiscal situation has not changed substantially, taking into account that the tax collection continues to surprise downwards,” they explained.
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The report adds that proof of this are the cash problems derived from this situation and that budget execution has been at the lowest levels in recent history, in order to comply with the Fiscal Rule in 2024, very close to the established limits. The reform of the GSP and the fall of the financing law also added pressure.
“The change of Minister of Finance does not anticipate a substantial adjustment of the fiscal policy of the current Government and thus, as a whole, the fiscal panorama has not changed significantly as shown by the CDS,” they noted.
Deterioration explained
All of the above has influenced the fact that the debt offers that have been issued the country are not attractive and that in order to issue them, the rates must be higher than those of other market players, such as the United States.
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“During the time analyzed, the 10-year US Treasury rate showed a reduction of -4 basis points to 4.39%, suggesting that the deterioration of the country’s sovereign bonds is explained by a local factor,” they stated.
Now, among the reasons for this to happen, the analysts began by pointing out that everything begins with the greater issuance of TES by the Government to public entities and direct payments, since according to their calculations, despite the fact that the Government ended the issuance of TES through primary auctions in October, in November the TES curve fixed rate (TF) recorded an increase in the balance of its maturities between 2026 and 2050 of $9.1 trillion.
Debt
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“Of these, $3.9 billion were given through the buyback strategy for early redemption, $2.8 billion for the Government’s payment to Ecopetrol of the balance of the Fuel Price Stabilization Fund (FEPC) that was given TES of 2026 and, finally, the issuance of TES to public entities for $2.4 trillion with securities to 2050, this being the highest monthly issuance since March of this year,” they noted.
The fact that debt has to be resorted to to alleviate the cash squeeze, especially from public entities and Ecopetrol, has generated an increase in supply that has not been accompanied by growing demand, despite the financing needs that the Nation has.
“During December, the TES TF to 2026 issued to Ecopetrol have had an increase of +44 basis points and, in the TES TF to 2050 issued to public entities, the increase has been +39 points, both above the average of the curve. Contrary to the greater supply of paper, the purchasing flows from months ago have been reduced,” they said.
This imbalance between supply and demand puts upward pressure on rates, generating an increase in the cost of financing for the Government and negatively affecting the public debt curve, a situation that is proven by saying that pension funds carried out the lowest monthly accumulation of TES in the year ($1.9 trillion versus $3.7 trillion on average between January and October.
“The Bank of the Republic left behind its purchasing stance seen between June and September and foreigners completed three months of net sales of TES. As if that were not enough, given the Government’s cash problems, the Ministry of Finance sold TES at the most relevant monthly rate since December 2022. Thus, given the high abundance of paper, only commercial banks, pension funds and insurance companies “They have faced the situation, with purchase flows above $1 billion,” the report says.
Tax debt
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Immediate consequences
With all of the above on the table, the experts from Banco de Bogotá issued an alert related to the fiscal impacts that this could have in the future, starting with the fact that more resources must be allocated to the payment of interest, limiting its ability to finance social programs and investment projects.
This, from their perspective, creates additional fiscal pressure and could lead to tax reforms or budget cuts, impacting the population, at a time when the space for maneuver is increasingly reduced and it is necessary to turn this situation around as soon as possible to promote reactivation.
“Of the issuance goal by public entities and direct payments stipulated in the Medium Term Fiscal Framework – MFMP for $22.7 billion, the Government has already issued between $18.7 billion and $19.7 billion. Given that this shortfall in issuance is usually made to entities with cash needs, the sales flow would be extended and the deterioration of the TES could last a little longer. For the following year, the situation would not be different,” they concluded.
In this way, they recommended being more cautious with the handling of this issue, given that if it is not done, they will end up hitting the perception of investors and rating agencies. “If confidence in the country’s fiscal management decreases, the credit rating could be lowered, making access to external financing even more expensive,” they explained.
