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Colombia: Medium Term Fiscal Framework: higher issuances in both 2017 and 2018 support our call of further steepening in the TES curve

 

June 15, 2017 (Investorideas.com Newswire) Yesterday, the Ministry of Finance (MoF) released the 2017 Medium Term Fiscal Framework (MFMP), which includes the overall Financial Plan of the public sector for the next 10 years. While the projected path for the fiscal deficit posted no surprises given its recent update (see report), a strong increase of TES issuances in the local market was announced as a result of wider fiscal deficits targets vs those set in 2016 MFMP, treasury operations from the MoF and, the goal of rebalancing the internal/external public debt composition. Overall, given the current stance of BanRep's monetary policy and the pressures from the higher issuances, we reaffirm our expectation that the TES curve should post a further steepening ahead (we will release a more detailed analysis of the full 2017 MFMP tomorrow).

In last year's MFMP, it was announced that the Advisory Committee of the Fiscal Rule decided to set specific targets of the fiscal deficit for the Central Government (GNC) for both 2017 and 2018 at 3.3% of GDP and 2.7%, respectively, suspending temporarily the methodology to estimate the allowed effective fiscal deficit under the parameters of the rule. This, given that the deficit that would have been permitted by the methodology was not consistent with the macroeconomic reality at that time, primarily due to a very high current account deficit. However, in Mar-17 the Committee revised to the upside the allowed fiscal deficit (to 3.6% of GDP for 2017 and to 3.1% for 2018), as macroeconomic risks that explained the initial goals decreased last year, particularly after the faster-than-expected correction in the external balance. Thus, the recent updates of the fiscal deficits were not modified in yesterday's MFMP.

Overall, the 0.3pp increase in this year's deficit to 3.6% of GDP vs 2016 MFMP (roughly COP 2.75tn) will be financed with higher local TES issuances. In addition, it is worth noting that the MoF has already made purchases of COP 4tn in TES with maturities in 2018 in order to reduce the internal debt service in that year, which would have been close to COP 21tn without this early redemption. In order to offset the reduction in cash caused by the purchases of the 2018 references, the MoF will issue the same COP 4tn amount in longer-term TES this year. Hence, the additional needs of the higher deficit and the execution of this anticipated redemption entail higher TES issuances of COP 6.4tn (to COP 39.7tn) in comparison to the amount established in the financial plan update published in early 2017 (see table 1).

Out of the COP 6.4tn of additional issuances this year, COP 2tn will be through auctions in the primary market, other COP 2tn will be placed to the public entities, COP 1tn will come from a new long-term TES UVR reference designed to couple with the needs of some institutional investors will be issued (i.e. for annuities and programed retirement plans), while the remaining COP 1.4tn will be destined to the financing of the Fuels' Prices Stabilization Fund. As for the higher issuances to the public entities, the MoF mentioned that this is explained by a higher than expected cash positions. Moreover, out of all the COP 39.7tn of TES issuances in 2017, COP 27.5tn were set through auctions in the primary market, of which COP 15.9tn have already been placed (57.8%).

As for 2018, TES issuances will remain high given the wider fiscal deficit stablished in Mar-17 (from 2.7% of GDP in 2016 MFMP to 3.1%), standing at COP 39.2tn, relatively flat in comparison to 2017, while the auctions in the primary market decrease by COP 0.5tn to COP 27tn. Moreover, long-term TES UVR issuances will reach COP 3tn vs. COP 1tn this year, and placements to public entities remained at COP 9tn.

Finally, the silver lining of the higher TES issuances in the local market is the aim to rebalance the internal/external public debt composition back to the 70%-30% level. Recall that following the sharp depreciation of the COP since mid-2014, such proportion reached 60%-40% while it currently stands at 65%-35%. This would be accomplished not only with higher local placements but also with lower external financing in 2018 (COP 11.7tn in 2018 vs. COP 17.2tn this year).

While the TES COP curve has posted some steepening recently, we think that both local and external fundamentals point to the continuation of this trend:

The higher issuances of TES explained by the treasury operations and the additional needs from the wider deficits should entail pressures to the long end of the TES curve.

Recently, we updated our fair value estimate for the 10-year TES COP. Our results suggest that the yield for this reference should lie between 5.9% an 8.3%, with 7.1% as mid-point. Although we do not rule out lower yields in the short term amid the current global and local background, we expect higher levels in the long term once the TES COP Aug-26 currently lies close to the floor of the range (see report).

On the monetary policy front, BanRep's Governor, Juan José Echavarría, recently stated that he expects the Central Bank to cut the repo rate by additional 100bp this year from its current level, in line with our forecast (5.25%).

Finally, given that the market is not currently pricing in additional increases in the reference rate from the Fed in the remainder of 2017, we do not rule out an upward correction of Treasuries in the upcoming months as the expectations on additional increases can grow while plans for its balance sheet cut have been unveiled.

For charts, tables and the full report, see the attached file.

Daniel Velandia, CFA
+ (571) 3394400 Ext. 1505
dvelandia@credicorpcapital.com

Camilo Durán
+ (571) 3394400 Ext. 138
caduran@credicorpcapital.com

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Este mensaje y sus anexos pueden contener información confidencial o legalmente protegida y no puede ser utilizada ni divulgada por personas diferentes a su destinatario. Si por error recibe este mensaje, por favor avise inmediatamente a su remitente y destruya el correo y sus adjuntos. Cualquier uso, divulgación, copia, distribución, impresión o acto derivado del conocimiento total o parcial de este mensaje sin autorización de Credicorp Capital Ltd. y/o cualquiera de sus afiliadas o subsidiarias será sancionado de acuerdo con las normas legales vigentes. El presente correo electrónico sólo refleja la opinión de su remitente y no representa necesariamente la opinión oficial de Credicorp Capital Ltd. y/o de sus afiliadas y/o subsidiarias. Los correos electrónicos son susceptibles de alteración. Ni Credicorp Capital Ltd., ni ninguna de sus afiliadas o subsidiarias serán responsables por el contenido del mensaje. Gracias por su cooperación. This message and its attachments may contain confidential or legally privileged information and may not be used or disclosed by anyone other than the intended recipient. If by mistake, you receive this message, please notify the sender immediately and destroy the message and its attachment. Any use, disclosure, copying, distribution, printing or action arising from the total or partial knowledge of this message without the authorization of Credicorp Capital Ltd. and/or its affiliates or subsidiaries will be punished in accordance with legal regulations. This email only reflects the opinion of the sender and do not necessarily represents the official views of Credicorp Capital Ltd. and/or its affiliates or subsidiaries. E-mails are susceptible to alteration. Neither Credicorp Capital Ltd nor any of its affiliates or subsidiaries is liable for the content of the message. Thank you for your cooperation.

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