Colombia Bond Market Roiled by Petro's Budget Overhaul

Colombian President Gustavo Petro's recent budget overhaul is causing significant unease among global investors, leading to a selloff in the country's bond market, as reported by Bloomberg. The move, which shifts more revenue and spending to regional governments, has fueled concerns about Colombia's long-term fiscal health.

Petro's actions have triggered a sharp decline in bond prices, with some notes trading near one-year lows. This comes despite assurances from government officials that the fiscal impact will be limited.

"Given the weak fiscal performance that we have seen so far under this government and President Petro’s clear preference for more spending, it is understandable that some in the market are skeptical," says Graham Stock, senior sovereign strategist with RBC Bluebay, to Bloomberg.

Finance Minister Ricardo Bonilla has acknowledged that the budget deficit will widen to 5.6% of gross domestic product this year, up from 4.3% in 2023. However, the finance ministry has not yet responded to requests for comment on the market reaction.

Investor skepticism has been evident throughout the year, negatively impacting both dollar bonds and the Colombian peso. Longer-term bonds (20 and 30 years) have experienced particularly sharp losses, shedding as much as 8% this year. Colombian bonds overall have underperformed, delivering a 1.2% loss compared to a 7.2% gain for the broader index.

Analysts warn that bond prices already reflect expectations of potential rating downgrades. The Colombian peso has also weakened, falling below 4,500 per dollar for the first time since May 2023, prompting JPMorgan Chase & Co. to downgrade the currency to underperform, citing a "precarious" fiscal position.

Market sensitivity to news from Colombia is heightened by global uncertainty surrounding the recent US election and the potential impact of Donald Trump's policies.

The market's reaction also reflects growing concerns over the Petro administration's fiscal management. The government's failure to reach an agreement with Congress on the 2025 budget, forcing Petro to approve it by decree, and the need to secure legislative support for a plan to finance next year's spending with lower-than-expected tax revenue, have contributed to investor unease.

"Idiosyncratic factors have increased the sensitivity of assets to external factors," acknowledges central bank co-director Bibiana Taboada.