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Colombia’s sovereign dollar bonds dropped across the curve on Thursday after local media reported that the government might suspend the fiscal rule that limited budget spending and helped steady the markets for more than a decade.
Notes due in 2054 slipped 0.3 cent on the dollar, the biggest drop in two weeks, according to indicative pricing data compiled by Bloomberg. Local government peso bonds, or TES, also fell.
W Radio reported that the government’s fiscal committee was discussing whether to apply the escape clause that allows the government to suspend the rule, supposedly under extraordinary circumstances. Mauricio Villamizar, a member of the central bank’s board, warned against such a move.
“The absence of a credible fiscal anchor at this stage would be especially concerning for Colombia,” Villamizar wrote in response to questions. “There does not appear to be a justified need for an escape clause within the fiscal rule framework.”
The fiscal committee will announce a new budget plan next week. Until now, the fiscal rule has provided an anchor for such plans and calmed investors by placing limits on the government’s ability to run up debt.
“This wasn’t priced in,” said Munir Jalil, chief Andean economist at BTG Pactual, in response to written questions. “Part of the devaluation we’re seeing today in long-dated TES is due to this.”
The Finance Ministry didn’t reply to a written request for comment.
Andres Pardo, a strategist at XP Investments, said that although he didn’t think a suspension was fully priced in, “the risk of worse deficits after 2025 was high, so I don’t think it will be a huge surprise.”
Analysts surveyed by Bloomberg have steadily lifted their 2025 deficit forecasts in recent weeks as tax revenues lagged expectations. At the same time, the government of President Gustavo Petro has declined to rein in spending on the scale needed, leading a finance minister to quit in March.
The government said in February that it aims at a budget deficit of 5.1% of gross domestic product in 2025. However, many economists now expect a fiscal gap equivalent to more than 7% of GDP, the widest since the pandemic.
“There is no extraordinary event that compromises macroeconomic stability that would justify activating the fiscal rule’s escape clause,” said Luis Fernando Mejia, head of the economic think tank Fedesarrollo, in a post on X. “Doing so would send a terrible signal to the markets about the government’s commitment to fiscal sustainability and would worsen the situation by further increasing the cost of borrowing.”
–With assistance from Nicolle Yapur.
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