(Bloomberg) -- Bond investors aren’t in a forgiving mood right now. Not with inflation soaring across the globe and eating into the value of their investments.
So when Gustavo Petro, Colombia’s new leftist president, and the more radical members of his cabinet started publicly mulling a bunch of heterodox policy proposals, including a plan to issue debt to buy land for the poor, the market reaction was swift. Investors dumped local government bonds, sending the peso tumbling and yields soaring.
The whole thing has gotten so out of control, with benchmark local yields topping 15%, the highest in nearly two decades, that Finance Minister Jose Antonio Ocampo and his aides have been forced to come out repeatedly to throw cold water on Petro’s ideas and try to calm markets down.
This week, Ocampo even halted local bond sales for the rest of the year. This helped give the market a lift, at least briefly, but underscores how investors are quickly imposing limitations on Petro’s ambitions to reshape the Colombian economy, just as they’ve done in the UK to former Prime Minister Liz Truss.
Investors are now pricing in a “Petro risk-premium” on fears that the government might try to adopt measures such as a tax on capital outflows, tough restrictions on energy producers and spending that breaches the nation’s deficit limits, according to Benito Berber, chief Latin America economist at Natixis.
“The market is seeing some cabinet members and President Petro with a dangerously populist discourse,” Berber said in an interview.
Worst Performer
Colombia’s local currency bonds have lost almost 24% in dollar terms since Petro was elected in June, the worst performance in a Bloomberg emerging market debt index which lost close to 6% over that period. And the peso has weakened 20%, the biggest drop among major emerging markets. On Thursday, the currency closed at a fresh record low of 4,904 per dollar.
Petro, by far the most radical leader in the Andean nation’s history, was elected on pledges to boost spending on welfare, schools and universities, and to buy up land to distribute to poor farmers. But his plans to transform the lives of millions of impoverished Colombians risk being derailed by soaring financing costs.
On Wednesday, Petro blamed interest rate rises by the US Federal Reserve for sucking capital out of South America, and urged investors to keep money in Colombia to take advantage of all the nation’s opportunities.
Petro’s appointment of Ocampo, a former Columbia University Professor and perhaps Colombia’s best-known economist, reassured investors that public finances were in safe hands. On his first day in office, Ocampo sent a bill to congress to boost tax revenue by raising levies on the rich and on oil and coal producers.
But Ocampo has had to take on a bigger role than is usually expected of a Colombian finance minister as he continually corrects “half-cooked” statements made by other members of the administration, said Mauricio Cardenas who himself was finance chief until 2018.
“He is the grounding pole in a disorderly government,” Cardenas said. He has been “providing reassurance to markets, oftentimes contradicting other members of the government. That’s an unpleasant job that obviously will generate tensions.”
Earlier this month, Petro triggered a sell-off in the nation’s bonds and currency after he criticized the central bank’s interest rate increases and mulled a possible tax on capital outflows. Ocampo spoke to reporters the following day to “point out very emphatically” that measures such as capital controls aren’t being considered.
When the nation’s deputy mines and energy minister said the government won’t sign new oil exploration contracts, Ocampo soon contradicted her by saying that decision hasn’t been made.
Then the presidency announced that Colombia will buy 3 million hectares of land for farmers -- which Petro said could cost an estimated 60 trillion pesos ($13 billion) -- and that in order to do so, it might issue public debt.
When asked in a press conference about plans to sell peso bonds, known as TES, for land purchases, Ocampo responded “I don’t know if the President said that or not but, in any case, at the Finance Ministry it’s clear that it cannot be done. You cannot buy land with TES.”
Investor Jitters
Even so, such announcements “have affected the government’s credibility even with a prominent figure in his cabinet such as Ocampo,” said Munir Jalil, head analyst at BTG Pactual Colombia.
The talk of capital controls worried the foreign fund managers who are now the biggest holders of Colombian government debt, he added.
Ocampo’s office said he was unable to comment ahead of publication, since he was in congress dealing with the tax bill. The presidency referred questions to the finance ministry.
At an event in Bogota this week, Ocampo rejected any comparison of Colombia’s fiscal policies with the UK’s, since the Andean nation is raising taxes to fund its spending plans, unlike the recent “mini-budget” from Prime Minister Liz Truss, who stood down Thursday.
“The Prime Minister and her Chancellor of the Exchequer went with a policy of increasing public debt,” Ocampo said. “Not us.”
Petro took office in August with inflation at its fastest pace in two decades, and with a series of steep interest rate rises by the central bank almost certain to provoke a sharp economic slowdown in the near future. The central bank expects economic growth to slow to 0.7% next year from an estimated 7.8% in 2022.
The situation is difficult in most emerging markets, due to rising US interest rates and fears of a global recession. Even so, Colombia’s selloff has been deeper than that of its peers.
“Adult in the Room”
While Ocampo has so far been an effective counterbalance for Petro, that may last only while the new government’s approval ratings hold up, according to Sergio Guzman, director of Colombia Risk Analysis. Petro’s approval rating fell to 46% this month, from 56% in August, according to an Invamer poll published this week.
“For the time being he is an assurance for markets that there is an adult in the room,” said Guzman. “But when Petro can’t meet his promises of historical change, he’ll look for scapegoats,” including Ocampo, he said.
Still, investors need to keep in mind that many of the policies announced by the Petro administration don’t have a concrete plan, and once they do, it will likely imply a gradual process that needs congressional approval, according to Armando Armenta, an emerging-market strategist at AllianceBernstein.
“Investors and the public in general need to separate noise from signal with the new administration,” said Armenta. “The government needs to send strong and credible signals to restore investors’ confidence and improve sentiment.”
(Updates yields in 3rd paragraph; peso in 7th paragraph; adds Ocampo comment in 20th paragraph.)
©2022 Bloomberg L.P.
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