Colombia: Political risks picking up – BBH

The central bank of Colombia has signaled that the easing cycle is nearing an end and it comes just as political risks are picking up ahead of elections this spring, notes the research team at BBH.

Key Quotes

“Political Outlook

• The presidential election will be held on May 27.  President Juan Manuel Santos cannot run again as he will have served the maximum two terms.  Polls now show former left-wing Bogota Mayor Gustavo Petro leading the race with 23% support.  Next comes former Medellin Mayor Sergio Fajardo with 18% and former Vice President German Vargas Lleras with 10%.

• Obviously, markets would be concerned if Petro were to win.  Until recently, Fajardo had been coming out on top of the polls.  If no candidate wins in the first round, a runoff vote will be held on June 17 between the top two vote-getters.  While we believe that orthodox policies have become institutionalized in Colombia, markets will not take uncertainty well in the near-term.”

“Economic Outlook

• The economy is finally picking up from a prolonged slowdown.  GDP growth is forecast by the IMF to accelerate to 2.8% in 2018 from an estimated 1.7% in 2017.  GDP rose 2.0% y/y in Q3, the strongest rate since Q2 2016.  Monthly data in Q4 suggest some deceleration, however, and highlights modest downside risks to the growth forecasts.  

• The recent drop in oil prices, if sustained, is concerning.  Despite candidate Petro’s plans to diversify, the Colombian economy will remain highly dependent on oil and other commodities.  WTI oil had trouble sustaining a move above $65 and so perhaps it will trade in a $55-65 range for now.

• The central bank cut rates 25 bp at the January meeting, as expected.  Next policy meeting is March 20, and no move seems likely after the bank signaled steady rates.  In minutes from the last meeting, the bank reveals that all members of the board agreed that given all available information, the easing cycle had likely ended.  The vote was 4-3 in favor of a 25 bp cut.”

“Investment Outlook

• The peso has outperformed after underperforming in 2017.  In 2017, COP rose 0.5% vs. USD and was ahead of only the worst performers ARS (-14.5%), TRY (-7%), BRL (-2%), IDR (-1%), and PHP (-0.5%).  So far in 2018, COP is +3% YTD and behind only the best performers MXN (+5.5%), THB (+3.5%), ZAR (+3.5%), and CLP (+3.3%).
• Our EM FX model shows the peso to have WEAK fundamentals, and so it should start to underperform more.  The correlation between WTI oil and COP has strengthened since October, and stands around -0.52 vs. 0.0 last fall.  IF WTI oil remains in a $55-65 range, then we suspect USD/COP will remain in a 2750-3000 range.
• Our own sovereign ratings model showed Colombia’s implied rating falling a notch to BBB-/Baa3/BBB-.  This supports S&P’s recent downgrade to BBB-, and suggests downward pressure on Moody’s and Fitch’s ratings of Baa2 and BBB, respectively.”