|Juan Mario Laserna|
Juan Mario Laserna, Colombia’s newest minister of public credit, has the daunting challenge of raising hundreds of millions of dollars in international loans at a time when the news from Colombia seems to go from bad to worse. President Andrés Pastrana’s administration is in disarray and peace talks with guerrilla leaders seem to be going nowhere.
Last year the country lost its investment-grade rating, costing it a good part of its natural market, such as insurance companies. In May, Standard&Poor’s downgraded Columbia’s foreign currency rating to BB, from BB+, citing fiscal and political concerns, and poorer growth propects stemming from guerrilla violence. Crossover investors – those who generally invest in high-grade assets and occasionally in emerging markets – have also apparently disappeared from the scene. “We know that,” says the 32-year old Laserna. “And that is why we have to treat those customers that we still have, better.”
The government has opened a financial representative office in Washington, DC to get its message across to investors more effectively. Laserna, previously the deputy finance minister, says “we needed someone in Washington to have permanent contacts with the markets, to educate the markets on the situation in Colombia, and to tell us what the market is thinking about us.”
Colombia is following in the footsteps of Chile, which has an office in New York, and Argentina, which has one in Washington. Claudia Franco, the Colombian-born former JP Morgan investment banker who heads Colombia’s DC office, has her work cut out.
Franco describes her principal challenge “as getting investors to see past the noise coming out of Colombia” and helping them understand that the situation is not necessarily worse than before, just more complicated. “What has changed in the equation is the importance the Pastrana administration has given to attaining peace in Colombia,” she says. Franco admits that this is not an easy message to convey.
Financial markets have largely ignored guerrilla warfare in the past, but cannot live with a loss of direction in economic policy, says Joyce Chang, global head of international fixed income research at Chase Securities in New York. “In the past, Bogotá managed to keep its politics and economics apart,” she says. “Not any more.”
The spread on Colombia’s benchmark 20-year bond issued in February has dropped to levels that are comparable with bonds in Venezuela and Brazil, countries that have a lower rating than Colombia’s Ba2 rating from Moody’s and its new BB rating, with a negative outlook, from Standard&Poor’s. The Colombian ’20 was originally priced at 97.53 and has fallen as low as 73.50 so far this year. Investors have stampeded because they believe Pastrana’s attempt to revamp the legislature could hinder the government’s efforts to straighten out public finances. They also are concerned over the worsening civil conflict.
The markets had expected the government to pass legislation to expand the tax base, strengthen control over government spending, and reform the pension system as part of a $2.7 billion International Monetary Fund agreement signed late last year. The government had also said it would privatize Carbocol, the coal mining company, as well as the telephone company ETB and Isagen, an electric utility.
The political crisis will likely postpone reform efforts for some time. Finance Minister Juan Camillo Restrepo cut spending by $540 million in May in an attempt to head off concerns over a bulging budget deficit. He has promised to cut more if necessary to meet his IMF-mandated deficit target of 3.6% of GDP this year, down from last year’s 5.3%. Yet not everyone is convinced by promises. Chase projects the deficit to end this year at about 4.5% of GDP.
A Bleak Outlook
Colombia has probably not looked this bad for many years. Undeterred, Laserna says the privatization of Carbocol and Isagen will proceed. Furthermore, he hopes Congress will support more budget cuts and more privatizations. Laserna is convinced markets will take heart as the government fulfills its promises and shows that it is “serious about meeting the IMF targets and implementing structural reforms.”
Through Franco, the Colombian government hopes to be more transparent and forthcoming with information. “This will go a long way towards addressing the impression in the past that getting information out of Colombia is a problem,” says Chang.
Franco also needs to help the government improve management of its financial affairs. A glaring blunder was a decision in February to price a $500 million 20-year issue the same day Federal Reserve Chairman Alan Greenspan gave his Humphrey Hawkings testimony before Congress. The lead managers on the deal were Goldman, Sachs and Chase Manhattan. Market consensus is that Bogotá and its bankers should have known better to avoid the volatility that Greenspan’s testimony would unleash.
The Colombian government has already raised $1.25 billion this year and Laserna says it needs to borrow up to $700 million more. How much of that will have to be raised in the international capital markets depends, he says, on how much he is able to raise elsewhere.
Laserna says he is about to conclude a $175 million loan from Corporacion Andino de Fomento, the regional development bank, and is having “serious” conversations with Japanese banks about a $200 million syndicated loan. Colombia might opt instead for a Samurai bond, or indeed issue a Samurai in addition to the loan.
Although Wall Street analysts often say Bogotá tends to underestimate its financing needs, most agree with Laserna’s view that Colombia should have little problem in raising what it needs this year. At the very worst, notes Chang, Colombia can borrow more from the IMF or borrow on the domestic market. Both Laserna and Franco worry that borrowing from Colombians would put pressure on domestic interest rates and abort the economic recovery.
Laserna says the real challenge will come next year, when Colombia must raise between $1.5 billion and $2 billion. He says he is already negotiating a bond guarantee from CAF and the Inter-American Development Bank to help Colombia raise between $1.2 billion and $1.5 billion in loans later in the year that he would use to cover the government’s 2001 financing needs.
Chang says she is more concerned about Colombia’s ability to borrow on a sustained basis in the future. To do so, she says “Bogotá needs to put a fiscal framework in place that will lead the market to believe that it could manage its debt in subsequent years.” Franco may be a fine saleswoman, but without a convincing story to tell, skeptical markets that are becoming more and more averse to risky Latin borrowers may find they can do without Colombian risk.
A crucial first step is for Pastrana to regain the political initiative to pacify the country. One analyst said that if the government cannot “get its act together, there is nothing that can be said from Washington or elsewhere that can get the market to change its views on Colombia. You can’t blame the messenger.”