Goldman Sachs, Citi, and BlackRock Are All Betting on Colombia Bonds

Major New York investors believe Colombia’s economy is poised for a rebound once oil prices recover, with Goldman Sachs, Citigroup, BlackRock Inc, and Franklin Templeton leading the charge, according to a report from Bloomberg.

They see a country that is doing everything right in terms of making fiscal adjustments and maintaining sound monetary policy. So as the price of oil creeps back up from its recent staggering lows — as Brent crude did in August, rising 11% — Colombian assets are set to rise along with the tide.

Photo: Goldman Sachs Tower in Jersey City, New Jersey (Credit: Paulm27)

Goldman now ranks Colombia first in the world in terms of nations poised for a surge if oil prices continue their rally. BlackRock has it in the top three. Franklin Templeton “plowed $1.6 billion USD into Colombian debt through the second quarter,” reported Bloomberg, making the company the largest foreign holder of the bonds. Citigroup told investors recently that it is expecting more inflows into the market for Colombian bonds.

Those betting on Colombia may soon have plenty of followers looking for emerging market returns. Colombia’s local-currency bonds brought 5.8% returns in August, the highest of 31 emerging markets tracked by Bloomberg. In line with these results, the local peso strengthened by 3.3%, making it “the best-performing major currency in the developing world,” per Bloomberg.

“If oil prices stay in the $45-$50 range that our commodity team expects, Colombia could be the next place that outperforms,” Kamakshya Trivedi, chief emerging-market macro strategist at Goldman Sachs, told Bloomberg. “That’s one place where I see much more appreciation relative to forward markets.”

If the predictions hold and others jump back into Colombian bonds, this will be a throwback to a recent past that now feels like distant history.

Colombia had been the rising star of the region just a few years ago, showing major GDP growth at a time when Argentina and Venezuela were falling off a cliff, Brazil was beginning to show signs of weakness, and Mexico was having trouble expanding its economy. But since nearly two-thirds of the Andean nation’s exports come from fossil fuels, the plummet in commodities prices in late 2014 put Colombia into an age of austerity.

It has stayed afloat. Expectations for 2016 growth range from around 2%–3% in a time when only Peru, among the region’s larger economies, has been able to beat that rate. Budget cuts have been necessary to curb public spending. But the fiscal squeeze and deficit ratio has led Fitch Ratings to put the nation’s ratings on negative watch. That fallout soon spread with negative actions against state-controlled oil giant Ecopetrol, the nation’s largest bank in Bancolombia, several other big financial services companies, and the cities of Bogotá and Medellín.

Inflation has also raced out of control, hitting a 16-year high of 8.97% in July. This has widely been attributed to a food price spike cause by an El Niño-induced drought and a 45-day truckers strike that shut down major transportation routes. And it has eased, dropping to 8.1% last month. But the past six months have featured little in the way of good news.

Finance Minster Mauricio Cárdenas and President Juan Manuel Santos have been confident throughout the year, continually saying that the current challenges are short term hurdles. They believe that the headwinds will ease, and Colombia, especially now that peace has been reached with the Revolutionary Armed Forces of Colombia (FARC), will be back on its prior upward trajectory once oil prices cooperate.

Others are starting to agree, it seems. A few Wall Street big shots, as well as one of the world’s biggest reinsurers, are now seeing things the same way.