Colombia: Renewed political uncertainty likely to weigh on markets - BBH

 According to analysts from Brown Brother Harriman, after the peace referendum failed, the renewed political uncertainty is likely to weigh on Colombian markets, also increasing downgrade risks.

Key Quotes:

“The referendum on the FARC peace agreement failed by a razor-thin 50.2% to 49.8% margin.  Polls had suggested a fairly easy passage, but the “no” vote was driven by the perception that the deal was too lenient on the rebels.”

“Price pressures are finally easing, with CPI rising 8.1% y/y in August.  September CPI will be reported Wednesday and is expected to ease further to 7.4% from the 9% peak in July.”

“With inflation still above the 2-4% target range, however, easing is unlikely until 2017.  The central bank next meets October 31, and no change is expected then.”

“The peso has outperformed this year after a poor 2015.  In 2015, COP lost -25% vs. USD.  This was behind only the worst performers ARS (-35%), BRL (-33%), and ZAR (-25%).  So far this year, COP is up 8% YTD and is lagging only the best performers BRL (+23%), RUB (+18%), and ZAR (+13%).  Our EM FX model shows the peso to have VERY WEAK fundamentals, so this year’s outperformance is unexpected.”

“Colombian bonds have outperformed this year.  The yield on 10-year local currency government bonds is about -166 bp YTD.  This is behind only Brazil (-505 bp) and Indonesia (-174 bp).  With inflation likely to continue falling and the central bank’s next likely move to be a cut, we think Colombian bonds can continue outperforming but subject to growing downgrade risks.”

“Our own sovereign ratings model rates Colombia at BBB-/Baa3/BBB-.   As such, we believe actual ratings of BBB/Baa2/BBB are likely to be downgraded.  Indeed, Fitch cut the outlook on its BBB rating back in July from stable to negative.  S&P did the same back in early 2016.”