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Oxford Economics Say Colombian Peso Could Fall 9% With Petro’s Agenda

COLOMBIA
  • Colombian assets will suffer a hard blow if presidential candidate Gustavo Petro is elected and gets his reform package approved, Oxford Economics analyst wrote in a note.
  • Within the Bloomberg report of said research:
  • “If Gustavo Petro pushes through his populist agenda, we expect depleted fiscal credibility to depreciate the peso 9% against the US dollar, and a 1% structural increase in interest rates, while simultaneously dealing with increased risks of lower growth and higher inflation”
    • The peso would trade closer to COP4,850 per dollar by 2026 against a baseline forecast of COP4,450 per dollar
  • Oxford Economics’ base case is a scenario where Petro faces conservative Federico Gutierrez in the June 19 runoff.
    • “A tighter second-round race could help moderate radical moves and keep Petro from pushing unorthodox policies that could scar the economy in the long term”
  • Investors have key concerns over a Petro agenda:
    • The leftist senator’s agenda includes universal income for vulnerable families, the end of oil exploration and an overhaul of the private pension system.
    • “If implemented, such policies would impose a heavier burden on fiscal accounts at a time when fiscal consolidation is badly needed”.
  • Five-year bond yields would rise 8.5% compared to 7.1% baseline:
    • “An exogenous increase to five-year bond yields is expected to be detrimental to the determination of Colombia’s neutral policy rate”
    • Oxford Economics used a stress test scenario using EMBI spreads
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