Category: Regions

JPMorgan this week cut its exposure to Colombia debt to underweight from neutral as part of an overall reduction in EM fixed income investment. It sold a million sovereign 2024s at 112. Colombia looks rich relative to BB credits and year-to-date it has outperformed the EMBIG (+0.7%ytd versus -1.2% return in the EMBIG). “Colombia’s fundamentals are strong but less robust than other Latin peers as it will post a current account deficit of around 3% of GDP,” says JPM. “Moreover, external accounts are exposed to a potential decline in commodity prices and the likely reduction of FDI inflows in a context of tighter global liquidity,” it adds. Colombia will also be impacted by rising borrowing costs since a large fiscal deficit will force the government to rely heavily on the domestic and external markets. Overall, JPM took advantage of a rebound in EM to cut exposure in its EMBIG model portfolio. “While we see the EMBIG above 200bp as cheap on a fundamental basis, we reckon that spreads can widen further before conditions in global financial markets stabilize and the EMBIG drops to below this level,” says JPM.

Analysts are predicting another 25bp rate hike this week in Colombia. BBVA says the rate needs to move to 9.50% Friday, from 9.25%, owing to inflation, the threat to FDI from global credit pressures, and COP weakness. If it does not raise rates, BBVA warns of further peso vulnerability. However, Merrill Lynch goes against consensus, saying the Banco de la Republica will keep the reference rate at 9.25%. “The case for a pause has focused on the risk of overdoing a – to date 325bp – tightening, whose impact operates with a lag. This view points to the fact that there is already evidence that some of the impact from past measures is being reflected in slower monetary aggregates and credit expansion and higher market interest rates,” says Merrill. However, it says that if rates are frozen, minutes due two weeks after the meeting may not clarify whether the tightening cycle is over, or if there is just a technical pause.

Bilateral free trade agreements between the US and Peru and Colombia are likely on hold until 2009, says Bear Stearns. “The FTAs with Colombia (almost certainly) and with Peru (possibly) may have to await the next US administration before passing,” says the shop. It bases this view on growing friction between congressional Democrats and Colombia, and new concessions on labor standards being demanded of Peru. In addition, President Bush has little power to get things done. “The material implications of imminent failure are not as bad as they would seem, given that both countries benefit from trade preference treaties already in place,” adds Bear. Of the presidential candidates, Mitt Romney presents the best chances of FTAs with Peru, Colombia, and — hypothetically — Brazil passing, it adds.

Despite the fact that LatAm is posting its fourth year of continuous expansion at rates above its potential capacity, it is not overheating, says Moody’s. Of the main seven economies, only Colombia and Venezuela look to be a problem, with excess demand generating either inflation or external disequilibrium or a combination of both in at least the past two years, says the agency. However, the two countries represent just 11% of total LatAm GDP. “From a macroeconomic point of view, we can conclude that Latin America as a whole region is not in an overheating situation,” says Moody’s. “And most probably will not be in the near future since the region’s performance is naturally moderating according to its current production capacity,” it adds. The whole region’s growth during the past four years, including 2007 with a 4.5%-5.0% expansion, has been above potential, without inflation or an external imbalance. “In fact there has been a declining inflation instead, with the rate steadily falling from 8.5% in 2003 to 5.0% in 2006, and most probably will stay around that rate in 2007,” says Moody’s. It adds that at the same time, the external balance has strongly improved.