Financial Bloodbath: Colombian Bellwether Stocks Avianca & Ecopetrol, Colombian Peso All Plunge

Colombia now has as many as nine confirmed Coronavirus victims, but fortunately no deaths. On the other hand, the country receives slightly more than 50% of their foreign exchange from petroleum exports, and another significant portion from its growing tourism industry. The Saudi-Russia trade war has halved petroleum prices and the Coronavirus is shutting down tourism; especially international traffic.

Today the government announced the first Coronavirus COVID-19 infection in the tourism-driven city of Cartagena. The patient, an 95 year old American woman arrived on a British operated cruise line. The Interamerican Development Bank this afternoon cancelled their international gathering scheduled for next week in Barranquilla. The annual Feria de las 2 Ruedas held in Medellín’s Plaza Mayor convention center is on for now but has cancelled its pavilion of Chinese exporters.

Colombian airline Avianca (NYSE: AVH), facing trouble on multiple fronts with scandals and operational issues, is down by more than half, to $2.44 at today’s close compared to $5.00 on February 20. The price fell over 17% the last day alone.

All charts in this article from Google

The company was in technical default a year ago, and its offices were raided by Colombian regulators last month. Now, with the pandemic and tourism drop off, passenger load factors are destined to decrease. Also, a large part of the company’s business is done in Colombian pesos, but must pay dollar denominated debt to creditors like United Airlines (NASDAQ: UAL) and Citadel Advisors.

Colombia’s state controlled petroleum company Ecopetrol also trades on the New York Stock Exchange (NYSE: EC). The generally well run company has recently diversified into holdings in Texas and the US gulf coast. Colombia is facing diminishing natural gas reserves even though that gas is in the ground. Hydraulic fracturing is politically controversial and opposition may hinder the company from using unconventional methods to efficiently extract enough resources to service domestic demand, much less export—a traditional source of foreign reserves for the South American country.

On March 9 when Saudi Arabia initiated a petroleum trade war with Russia, prices fell 30% after crude prices fell over the weekend by over 60%, from $51.99 to $34.71 USD (OPEC basket). This destroyed expectations by the Colombian government for dividends it was planning to receive from Ecopetrol. The petroleum company will now find it challenging to maintain positive margin between production costs and crude pricing.

Ecopetrol’s challenges reverberate throughout the Colombian economy. The government depends on petroleum revenues to feed national spending. As the Colombian peso correlates with petroleum, the plunge in oil prices saw a commensurate plunge in the Colombian peso (COP) that now is at record lows against the dollar.

Today, one Colombian peso is only worth 0.026 US cents, so the smallest denomination Colombian coin, a 50 peso piece, is worth 1.3 US cents. The peso has also fallen off a cliff, going from under 3,400 pesos per dollar to over 3,800 pesos per dollar this week—record levels.

Normally, a weak peso increases tourism and demand for Colombian products and services, typically outsourced services such as IT and Customer Contact. This time it may be different though, as tourism has been all but shut down, and recession fears see north American companies, Colombia’s natural market, playing defense.

What’s next?

One bright spot may be Colombia’s mining sector. Gold does well in recessions, and Colombia has an active, growing precious metals mining sector. The unpopular administration of Ivan Duque took a billion dollar special dividend out of Ecopetrol in December to fund political promises and a budget deficit but now the economy’s troubles will likely overcome any effects that short term cash injection may have had.

External factors in the short term will dictate events on the ground. The two external variables are:

1. How long will the OPEC-Russia trade war last?
2. How long and how severe will the Coronavirus pandemic be?

The current president, scandal plagued and with a sub-30% approval rating has two years left in his administration. The impending recession will likely play out the rest of this year, and it is not known what the fallout in 2021 will be.  Colombia has never elected a far-left president, but with a declining economy, political and human rights scandals, it is hard to predict if the president can survive to a second term, and if not, who the alternative might be. In a runoff last election, President Ivan Duque defeated left-wing radical and former revolutionary militant Gustavo Petro, now serving in the Colombian Senate. Petro has defined himself as an enemy of mining and petroleum, and generally anticapitalist.

Ecopetrol has deep enough pockets, credit, government backing and operations to weather the coming uncertainty. The peso may rebound, but will at least stabilize, as the government isn’t printing money or borrowing beyond reason.

Growth may slow; the country is well along in its 4G highway project, but investors are wary of currency risk. The government has backed investments and co-signed to cover a fall in currency, but this will affect public coffers, and now it remains to be seen how the rapidly evolving environment will affect the appetite of foreign institutional investors for Colombian debt.

Avianca? It remains uncertain. How far is United Airlines willing to go to “protect its asset?” Can the airline withstand an almost certain drop in traffic, considering its heavy debt load that it just renegotiated? And with the CEO, Anko Van Der Werff taking steps that may alienate some passengers, when the economy rebounds, will the passengers return?

Time will tell.