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COLOMBIA: JP Morgan Moves UW COP As Fiscal Risks Mount

COLOMBIA
BulletEM BulletEmerging Market News
  • JP Morgan says that mounting fiscal risks amid a challenging external backdrop put Colombian assets in a precarious position. They note that policymakers have struggled to return to the ~3% of GDP pre-pandemic fiscal deficits, with continuously weak tax collection, attempts to change the fiscal rule and the decentralisation law the key fiscal concerns at the moment.
  • Without any offsetting measures, the decentralisation law, which aims to increase transfers from the central government to the regions, could add 1.7%-pts of GDP to the fiscal deficit over the next decade. Discussions continue in Congress, but any version of the law that doesn’t include a transfer of spending responsibilities is likely to further jeopardise Colombia's fiscal outlook.
  • JPM says that a potential local currency downgrade to junk will be a key focus next year, with Fitch already at BB+ and S&P at BBB- with a negative outlook. They believe this could trigger $2.5-5bn in outflows from fixed-rate COLTES, representing around 3.5-6.5% of the outstanding stock. JPM anticipates further currency weakness, with COLTES already reflecting increased risk premium, in their view, and move UW COP while staying MW TES in their model portfolio.
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  • JP Morgan says that mounting fiscal risks amid a challenging external backdrop put Colombian assets in a precarious position. They note that policymakers have struggled to return to the ~3% of GDP pre-pandemic fiscal deficits, with continuously weak tax collection, attempts to change the fiscal rule and the decentralisation law the key fiscal concerns at the moment.
  • Without any offsetting measures, the decentralisation law, which aims to increase transfers from the central government to the regions, could add 1.7%-pts of GDP to the fiscal deficit over the next decade. Discussions continue in Congress, but any version of the law that doesn’t include a transfer of spending responsibilities is likely to further jeopardise Colombia's fiscal outlook.
  • JPM says that a potential local currency downgrade to junk will be a key focus next year, with Fitch already at BB+ and S&P at BBB- with a negative outlook. They believe this could trigger $2.5-5bn in outflows from fixed-rate COLTES, representing around 3.5-6.5% of the outstanding stock. JPM anticipates further currency weakness, with COLTES already reflecting increased risk premium, in their view, and move UW COP while staying MW TES in their model portfolio.