Colombian bonds traded lower by multiple points after voters narrowly rejected a peace agreement with the FARC rebels.
The sovereign’s bonds dropped on Monday between 10bp to 20bp on the dollar curve, with the dollar-denominated 2026 bonds falling 1.875 points to 109 and the 2045 notes down 3.125 points to 105, a debt capital markets banker said.
Investors had expected Colombian voters to approve the peace agreement in a referendum over the weekend, but the market reacted better than expected, one investor said. The current economic environment in Colombia gives investors some breathing room, but the situation will likely get worse before it gets better, he said.
The potential agreement with the FARC rebels was expected to strengthen President Juan Manuel Santos’ position and help him pass a tax reform by the end of the year. The tax reform could help the government address the fall in oil revenues and allow the country to maintain its credit ratings.
Even if voters had approved the peace agreement, investors were expecting the government to make several concessions on the proposed tax reform. The No vote now makes it unlikely the tax reform will garner support in congress, which could lead to a credit downgrade for Colombia, the first investor said.
Moody’s said the results of the referendum are negative for the country’s credit profile and added it could undermine the government’s ability to pass reforms. Moody’s gives Colombia a Baa2 rating with a stable outlook.
S&P Global Ratings also said the result could complicate the government’s position to pass fiscal reforms. S&P gives Colombia a BBB- with a negative outlook.
One investor said Colombia could soon tap the cross-border bond market to raise funds for next year. With the outcome of the referendum, market conditions now look less favorable for the sovereign, he added.
Colombia’s finance ministry said in August that it will issue new local bonds this year for up to COP8tn ($2.77bn), using proceeds for some of its 2017 spending requirements.