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Morgan Stanley: Keep Somewhat Defensive Stance In Near Term

COLOMBIA
  • While the results of the first round of the presidential election suggest stronger-than-expected momentum for a scenario somewhat favouring policy continuity, Morgan Stanley think that volatility is bound to pick up going into the second round of the election, as the gap between the two candidates should narrow.
  • In addition, MS think that uncertainty around reforms addressing growth initiatives or tackling Colombia's wide fiscal imbalance remains high regardless of the potential winner of the election, suggesting that more structural rallies in local assets remain unlikely for now.
  • They prefer to keep a somewhat defensive stance in the near term, as more clarity on the proposed policies of both candidates develops, particularly those of Rodolfo Hernández.
    • In this environment, MS close their long USD/COP trade, but stay paid 10-year IBR, which also remains a cheap portfolio hedge against upside risks in US Treasuries.
  • On economics: Colombia’s next president will have to tackle macro imbalances, with uncertainty likely to linger: Colombia runs very wide current account and fiscal deficits (together amounting to nearly 12pp of GDP) at a time when external financial conditions are deteriorating sharply. Accordingly, to help to reduce those MS think that Colombia’s next president should pursue structural reforms in the fields of tax, infrastructure/productive diversification, pensions and labor.
  • Failure to tackle those challenges could lead to increased macro stability risks over time, in their view. In this regard, each candidate should face their own set of challenges. For instance, Mr. Petro’s proposal to gradually halt concessions of oil exploration contracts could risk widening the external imbalance. Meanwhile, Mr Hernández could face challenges to advance reforms in Congress given his party’s small representation there (roughly 1% of the Lower House and no representation in the Senate).
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