Colombia’s Debt Ratio Just Fell. It Borrowed $20bn More Anyway

Markets

Key Facts

—The headline. Colombia’s external debt fell to 51.6% of output in April, from 53.7% a year earlier, a level last seen in May 2020.

—The catch. Measured in dollars the stock rose from $227.9bn to $247.7bn, an increase of nearly $20bn, or 8.7%.

—The cause. The peso has strengthened sharply, which lifts the country’s output when converted into dollars and shrinks the ratio without shrinking the debt.

—The currency. One dollar bought 3,339 pesos on Thursday, the fewest in about six years, against more than 3,700 in January.

—The split. The state owes about $150bn of the total and companies about $97bn, and only the state’s share declined last month.

—The baseline. Before the pandemic the figure sat near 47% of output, so the adjustment is partial rather than a return to normal.

Colombia external debt has just dropped to its lowest share of national output in six years, which sounds like a country paying down what it owes, and is not.

The central bank reported this week that the stock stood at fifty-one point six percent of output in April. A year earlier it was fifty-three point seven percent.

That is a fall of more than two percentage points, and the last time the ratio sat this low was May 2020. Measured in dollars, however, the debt grew by almost twenty billion over the same twelve months.

Why Colombia external debt looks smaller without being smaller

A debt-to-output ratio is a fraction, and a fraction can shrink from below. Colombia’s peso has strengthened hard this year, and a stronger peso makes the country’s output larger when that output is converted into dollars.

The denominator grew, in other words, while the numerator also grew but more slowly. The ratio duly fell, and nothing was repaid.

Camilo Pérez, who runs economic research at Banco de Bogotá, put it plainly. He told the Colombian daily La República that the decline owed more to the exchange rate than to any real reduction in borrowing, and that the effect should be examined before anyone concludes the indicator has improved.

Wilson Tovar of the brokerage Acciones & Valores was blunter still. He said the figure can create a false perception of improvement, because the country has in fact borrowed more.

What the peso giveth

One dollar bought about three thousand three hundred and thirty-nine pesos on Thursday, the fewest in roughly six years. In January it bought more than three thousand seven hundred.

Part of that is a weaker dollar worldwide, and part is money flowing into Colombian assets after the June presidential election. The central bank also raised its policy rate to twelve percent at the end of June, which rewards anyone holding pesos.

A cheap dollar genuinely does make the debt easier to service today, since each interest payment costs fewer pesos. Tovar’s warning concerns tomorrow.

Should the peso weaken again, the cost of servicing that larger dollar stock rises for the state and for companies alike. The relief is real, and it is rented rather than owned.

Who actually reduced anything

Between March and April the total did drop, by nearly five billion dollars. All of that decline, and rather more besides, came from the government side on our reading of the central bank’s own breakdown.

Public external debt fell by around six billion, helped by the cancellation of a Swiss franc swap. Private external debt went the other way and rose by more than a billion.

The state owes roughly a hundred and fifty billion dollars abroad, or three-fifths of the total. Companies owe the remaining ninety-seven billion or so.

The number nobody put in a headline

While the ratio was falling, the government’s external interest bill was climbing steeply. It rose from six hundred and eighty-four million dollars to one billion one hundred and thirteen million over the period the central bank examined.

That is a rise of about sixty-three percent, a figure we calculated from the published components. A shrinking ratio and a swelling interest bill are not a contradiction, but they are an awkward pair.

The outgoing government has spent four years moving its borrowing from foreign markets into the domestic one. External debt has gone from about two-fifths of the total public debt in 2022 to roughly a quarter now.

That reduces the exposure to a falling peso, which is a defensible aim. It also means the state is now borrowing at home, in pesos, from a central bank that has just raised rates to twelve percent.

The maturity profile offers some comfort. Around eighty-six percent of what Colombia owes abroad falls due beyond a year, leaving roughly thirty-four billion dollars of short-term obligations.

Inflation, meanwhile, has turned the wrong way. Consumer prices rose six point one percent in the year to June, crossing six percent for the first time in twenty-two months, which is why the central bank is tightening rather than easing.

Is Colombia external debt back to pre-pandemic levels?

No, and the comparison is with May 2020, which was already inside the pandemic. Before 2020 the ratio sat near forty-seven percent of output, so at fifty-one point six percent the adjustment remains partial.

Does a strong peso help or hurt Colombia?

Both, depending on who you are. Importers, travellers and anyone servicing dollar debt gain, while exporters and commodity producers earn fewer pesos for the same sale.

What should an investor watch?

The dollar stock rather than the ratio, and the interest bill rather than either. A new government takes office on the seventh of August and inherits both.