In the first two months of 1997 an economic state of emergency was announced in Colombia and the currency tumbled. Then, barely a week after the emergency was over, a blow-out $1 billion global bond was issued that catapulted the country out of the second division of emerging markets into the ranks of investment-grade borrowers.
All this, and yet Colombia has problems few investment-grade borrowers have seen. The US government has kept Colombia decertified as punishment for alleged non-cooperation in the war against drugs and sanctions are possible. Domestic terrorist groups have staged assaults in jungles not far outside the capital, Bogotá. And 800,000 striking government workers hit the streets a week ago, demanding higher wages.
The economic state of emergency was implemented in mid-January in an attempt to get a grip on a fiscal deficit spiralling out of control. The deficit budgeted for 1997 was $4.5 billion 4% of GDP and that figure looked unlikely to be met.
The deficit, however, was only part of the problem: there was also the appreciation of the peso. Although the central bank was printing money regardless, the currency stubbornly refused to depreciate.
The bank has set a band within which the peso is allowed to move, ranging from 30% depreciation on the weak side to 15% appreciation on the strong side. In the second half of 1996 there was an influx of foreign investment, to both the public and private sector, in the form of debt and privatization receipts. The demand for pesos was such that the currency swung from the weak side of its band to the strong side in a period of just five months. The currency appreciated from Ps1,070 to the dollar at the beginning of July to Ps994 the strongest it could be given the currency band at the end of November.
"The major part of the decision to introduce the economic state of emergency had to do with consolidating the exchange rate band," says finance minister Jorge Ocampo. "We had a revaluation [depreciation] of 5%, which of course was one of the main objectives."
The announcement of the state of economic emergency took pressure off the central bank. The peso devalued sharply, back towards the centre of its band. Suddenly, domestic Colombian bonds were no longer the most attrractive in Latin America they had been offering 27% interest rates while the peso was rising against the dollar.
One of the central planks of the emergency programme was a clampdown on foreign inflows. There will be a flat 6% tax on all money borrowed abroad, which is aimed at cutting down on foreign investment while also raising $380 million to help fill the deficit.
Whether the tax will achieve its aims or not is debatable. With three-month dollar Libor under 6%, three-month peso-denominated Colombian bills offering 27% and inflation at 18%, it's still attractive to go abroad. Furthermore, Colombian companies already have tax incentives to borrow long, and the 6% tax spread over, say, three years works out at just 2% a year.
And there have been so many treasury bills issued to mop up the newly printed pesos (broad money increased by 30.2% in 1996) that they have propped up domestic interest rates. These will have to stay high to keep down inflation but will still offer very tempting returns to precisely those foreign investors the government doesn't want.
Despite $1.2 billion in announced cuts, a 15% across-the-board spending cut and a defence budget slashed by a third, Colombia's net borrowing requirement has not come down from 1996's $1.4 billion. Of 1997's requirement, $1 billion was raised in mid-February in a successful global bond, issued on the back of a convincing roadshow by Clemente del Valle, director general of public credit.
Finance minister Ocampo told Euromoney before the roadshow that he would like to see a 22.5% devaluation this year; this had been changed to 17% by the time he hit the road. With the majority of the global's proceeds still to enter Colombia, the government now has much more control over the exchange rate. Presently, it is repatriating the money in $10 million chunks, and using most of the balance for foreign debt repayments.
Colombia timed its global well. It issued the majority of its requirement when there was a lot of European demand for Latin American sovereign debt Brazil and Mexico issued Dm500 million and Dm1 billion Eurobonds respectively at about the same time. Furthermore, Colombia's bond was issued before the supreme court had time to rule the economic emergency unconstitutional, and before the US said that the country will remain decertified for not fighting drugs zealously enough.
The bond, lead-managed by Merrill Lynch and JP Morgan, was split into two tranches: a $750 million 10-year bond issued at 130 basis points over treasuries, and a $250m 30-year offering priced at 170bp over. They tightened in by a modest 4bp to 5bp respectively. This was all a far cry from even a year ago, when Colombia paid 273bp over treasuries to issue a 20-year yankee.
Traditional emerging markets investors stayed away, leaving the bond to Europeans who found a nice pick-up over identically rated countries like Poland and Slovakia which are issuing at less than 100bp over treasuries.
Del Valle has said that he is interested in raising the remaining $400 million to $500 million needed to finance the government's deficit in the Euroyen and Eurodeutschmark markets. Felix Salmon