The cost for Colombia to finance itself in domestic markets rather than borrowing pesos overseas is poised to fall after the government cut taxes on foreigners' local bond profits by more than half.
The difference between yields on locally issued notes due in 2024 and similar-maturity peso notes sold on international markets will shrink to 60 basis points, or 0.6 percentage point, in six months from 148 basis points today and 218 in November, according to Banco Bilbao Vizcaya Argentaria SA, the country's fourth-largest bank. The yield differential is three basis points in Peru and 148 in Chile.
President Juan Manuel Santos cut taxes on overseas investors' earnings from domestic securities to 14 percent from 33 percent as of Jan. 1 to help boost demand and lower borrowing costs. Only 3 percent of government peso bonds are held by foreigners, compared with 55 percent in Peru and 36 percent in Mexico.
"There's a lot of interest in participating in the local Colombian market," Alvaro Vivanco, a strategist at BBVA, said in a telephone interview from New York. The tax cut makes "yields very attractive. Investors will be moving into the local curve as the fundamental reason for holding global bonds disappears."
While increased investment from abroad may add to last year's 9.7 percent rally in the Colombian peso, the central bank said as recently as this week it will continue to buy dollars to curb currency gains that have hurt exporters.
The Finance Ministry didn't respond to telephone and e-mail messages seeking comment.
Finance Minister Mauricio Cardenas said Dec. 20, when lawmakers approved the tax reduction, that the government may take other measures to stem gains in the peso should the reduction in the levy spur more appreciation.
Colombia "can't lose the chance of lower borrowing costs," Cardenas told reporters in Bogota. "If this leads to problems with the exchange rate, we'll resort to other instruments."
Brazil imposed taxes on foreign investors' purchases of its local debt in 2009 as part of an effort to stem gains in the real that had crimped exporters' profits.
In Colombia, most foreign investors will pay the 14 percent levy on profits from the bonds, known as TES, except those from countries considered tax havens, which face a 25 percent tax.
The tax cut will lead investors to switch to Colombia's domestic debt from the overseas securities, according to Mario Castro, a strategist at Nomura Holdings Inc.
"This is a significant tax reduction that has a material impact on the final yield received by the investor," Castro said in an e-mailed response to questions. "In the local market, investors find more attractive yields and much more liquidity."
Felipe Hernandez, a Stamford, Connecticut-based economist at Royal Bank of Scotland Group Plc, says the peso will strengthen 4 percent to 1,700 per dollar from 1,771, increasing the pressure on the government to protect exporters.
The peso has advanced 1 percent since the tax bill was approved in Congress. It dropped 0.5 percent today on speculation the central bank will lower borrowing costs further. The strong peso is threatening jobs in agriculture and industry, Cardenas said on Oct. 4. In August, the Treasury joined the central bank in buying dollars to curb the currency's rally.
Central bank Governor Jose Dario Uribe said Jan. 2 on RCN Radio that the strengthening peso is a concern and reiterated that Banco de la Republica will buy at least $20 million a day through at least the first quarter.
"There's a collateral effect as foreign capital rises," Hernandez said. "It's an additional factor that will lead to the peso's appreciation" amid increased foreign-direct investment and high commodity prices, he said.
The extra yield that investors demand to own Colombian government dollar bonds instead of Treasuries widened two basis points to 103 basis points at 3:14 p.m. in New York, according to JPMorgan Chase & Co.
The cost to protect Colombian debt against non-payment for five years rose one basis point to 92 basis points, data compiled by Bloomberg show. Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.
Yields on Colombia's dollar bonds due in July 2021 rose two basis points to 2.41 percent.
The change in the levy will cause the yield gap between local and overseas peso debt to narrow to 115 basis points, according to Jorge Cardozo, an analyst at Bogota-based brokerage Corredores Asociados SA. The gap reached a record low 134 basis points on Oct. 12.
"There's room for more gains" in local bonds, Cardozo said in a telephone interview. "Everyone can come in to the market now. TES are now an investment alternative not only for locals but for foreigners as well."
--Courtesy of Bloomberg.com