(Bloomberg) -- Colombian assets tumbled Tuesday as markets reopened after leftist Gustavo Petro won Sunday’s presidential election on a platform to wean the country off its reliance on raw materials and tax the rich.
The peso slumped as much as 5% against the dollar, leading losses among the world’s major currencies, and stocks sank 5.4%. Sovereign dollar bonds were among the worst performers in emerging markets, while yields on local debt due 2024 surged to a record high. State-run oil company Ecopetrol SA’s securities also took a hit, with stocks down more than 10% and benchmark dollar bonds falling to an all-time low.
Investors are ditching Colombian assets amid concern that Petro will transform the country’s business-friendly model. The former guerrilla has pledged to stop awarding new oil exploration contracts, do a complete overhaul of the nation’s pension system and increase tax on the rich and large landowners.
“Investors’ concerns are justified and we expect Colombian markets to remain under pressure over the next few months,” said Olga Yangol, head of emerging-market research and strategy at Credit Agricole CIB. “Colombia’s fiscal and external vulnerabilities make the country particularly vulnerable to changes in investor sentiment.”
Some of Petro’s plans will be relatively simple to implement, such as firing the management of Colombia’s state oil company. Other proposals, such as taxing wealthy landowners and declaring an economic state of emergency, will be constrained by powerful institutions such as congress and the constitutional court. Petro doesn’t have a majority bloc in Congress.
Petro’s pick for finance minister will be key to appeasing investor concerns. Former presidential candidate for the centrist coalition Alejandro Gaviria has emerged as the favorite for markets, while other candidates include Jorge Garay, Rudolf Hommes, Jorge Ivan Gonzalez, Cecilia Lopez, Ricardo Bonilla and Luis Fernando Medina. Someone close to Petro’s circle of advisers could trigger further market losses, according to Andres Pardo, chief Latin America macro strategist at XP Investments.
“It is likely that part of the overshoot reverses as Petro sooth the markets and appoints a market friendly finance minister,” said Mario Castro, a strategist at BBVA. “In any case, COP will keep a premium going forward given the possibility of implementation of proposals such as the phase out of oil exploration which could have a negative impact on the external sector of the economy.”
Petro, who beat construction magnate Rodolfo Hernandez in the runoff by 50% of the votes against 47%, will take office on Aug. 7.
Thierry Larose, a portfolio manager at Vontobel Asset Management, said Colombia has enough checks and balances to prevent “economically irresponsible policies,” and given risk premiums are already wide he expects losses to be limited.
The cost to insure Colombian debt from non-payment with five year credit-default swaps rose as much as 21 basis points during early trading on Tuesday. It’s surged in the past year as Petro dominated pre-election polls, even trading wider than lower-rated Brazil at times.
Peso-denominated bonds particularly may pose a buying opportunity given how cheap they screen, according to Juan Prada, a strategist at Barclays.
“Other LatAm countries have seen relief rallies after assets cheapened with the victory of a leftist president, as markets conclude that reforms will not be implemented or the president moderates his initial platform in to achieve governability,” he wrote in a note Tuesday.
(Updates with stock market open, other markets moves throughout and analysts’ quotes.)
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