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

2. Agenda The Bond The Reasons The Risks

3. 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 11.875%; 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 12.125%;20bp below local curve Bid/Cover 1.6 Issued US$325 M

4. THE BOND Source: Finance Ministry

5. The Bond Source: Finance Ministry

6. The Reasons Reduce Currency Risk in Public Debt

7. Diversification of Investor Base Source: Banco de la República

8. Financial System Source: Banking Superintendency

9. Pension Funds Source: Banking Superintendency

10. 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

11. Long Local Market Source: Banco de la República

12. Long Local Market

13. 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

14. Somethings look better Source: Confis, Finance Ministry

15. Source: Banco de la República

17. Somethings look similar Source: Banco de la República

18. Somethings look larger… Source: Banco de la República

19. 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

20. 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

21. 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