Colombian Issuance of Local Currency Bond in the Global Market: what lies ahead Ana Fernanda Maiguashca.

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Colombian Issuance of Local Currency Bond in the Global Market: what lies ahead Ana Fernanda Maiguashca

Agenda The Bond The Reasons The Risks

The Colombian has been able to place two local currency bonds in the international market The Bond Global TES 2010 Coupon: 11.75% Nov 2004, Jan 2005 Yield %; 50bp below local curve Bid/Cover 2.93 Yield 10.75%; 31 below local curve Bid/Cover 2.04 Total Issued US$500 M Global TES 2015 Coupon 12% Feb 2005 Yield %;20bp below local curve Bid/Cover 1.6 Issued US$325 M

THE BOND Source: Finance Ministry

The Bond Source: Finance Ministry

The Reasons Reduce Currency Risk in Public Debt

Diversification of Investor Base Source: Banco de la República

Financial System Source: Banking Superintendency

Pension Funds Source: Banking Superintendency

Barriers to entry Like Brasil, local barriers to foreign portfolio investment: some explicit, some distorsions (ex. Taxes) Unlike Brasil, the Colombian government had a local alternative of equal or longer tenor and duration

Long Local Market Source: Banco de la República

Long Local Market

The Risks Evidence points to importance of international liquidity conditions and business cycle in determination of capital flows (Reinhart 2005) Even in presence of stronger fundamentals, policy makers should shield from a future crisis

Somethings look better Source: Confis, Finance Ministry

Source: Banco de la República

Somethings look similar Source: Banco de la República

Somethings look larger… Source: Banco de la República

The Risks Reducing currency risk exposure is part of the strategy: hedging structures and local market Local market is a limited strategy: market risk is increasing In August 2002 some problems of regulatory framework and supervision were brought to light

The Risks Some of those problems were improved but there are many others that remain –Volatility of TES (limited historical information) –Construction of the VAR model –Stress Testing for a sustained decrease in prices and no buyers –Disclosure of derivative positions –Disclosure of risk in pension fund portfolios

The Risks A failure to monitor and control market risks could be painful for government finances: in the 1999 crisis the credit crunch led credit institutions to the TES market….if they get hurt in this market now, the government may face financing challenges inside when doors are closing abroad

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