Postcards from emerging markets – Colombia
- Colombia’s new government has a plan to get its finances in order.
- We see hard currency Colombian sovereign bonds as attractive.
- But with rate cuts unlikely, we don’t view local currency bonds as cheap.
Earlier this year, I travelled to Bogotá to get a grip of the macroeconomic and political situation. During the veranillo, or mini-summer, the weather in Colombia’s high-altitude capital was cool, and this year, the winds of change were in the air. The recently elected President Abelardo de la Espriella, a right-wing proponent of mano dura or “iron fist” policies, has ambitious plans to take the country in a radically different direction to his predecessor, Gustavo Petro, Colombia’s first leftist president.
An overheating economy marked by a growing deficit
De la Espriella inherits a challenging macroeconomic backdrop. Investment in Colombia was depressed during the prior administration, while high government spending and remittances from Colombians abroad boosted consumption. Topped off by an increase of more than 20% in the legal minimum wage for 2026, the Colombian economy has been riding a sugar high of booming short-term growth and rising inflation.
The outgoing government also left some fiscal surprises for the new administration. It seems it made generous assumptions on expected revenues, understated interest expenses and failed to fulfil certain spending requirements, particularly in healthcare and energy. The new administration submitted a revised budget for 2027 to Congress estimating a 9.4% deficit.1 With high fiscal uncertainty and rising US interest rates, financing this deficit will be a challenge, in our view.
Hard currency bonds should benefit from budget discipline
Against this backdrop, we read positively the administration’s stated goal of a 2.2-percentage-point fall in the deficit in 2027 and a further consolidation in 2028.2 Vice President José Manuel Restrepo and Finance Minister Miguel Gómez are seen as credible by investors, who anticipate a programme of targeted expenditure cuts, maintaining public investment where possible, with the potential for future measures to raise revenues. However, the plan is not without execution risks – and expenditure cuts will face challenges in a divided Congress, where ex-president Petro’s Historic Pact party still poses a powerful opposition force.
Over the last five years, Colombia’s credit ratings have declined to reflect persistent spending pressures and budget inflexibility.3 However, we think the new government’s proposals should keep further rating downgrades at bay. Given that they currently trade at a discount to similarly rated countries, we see hard currency Colombian sovereign bonds as attractive.
A reset of relations with the central bank and IMF
De la Espriella, who styled himself as “El Tigre” during his campaign, enjoys the support of US President Donald Trump, suggesting he will benefit from warmer relations with the US than his predecessor. His choice of Restrepo, a former finance minister in the centre-right government of Iván Duque, as vice president also signals a less fractious relationship with the Colombian establishment than under Petro. The new government has signalled it will reengage with the IMF, which could lead to cheaper financing.
De la Espriella is also expected to normalise relations with Colombia’s central bank, the Banco de la República (BanRep), which were strained under Petro’s administration. BanRep remains a highly credible institution, which we expect to pursue its inflation objective with restrictive monetary policy. Given our expectations that rate cuts won’t come soon, we do not consider local currency Colombian bonds to be cheap at this point in the cycle.
Good intentions, bad starting hand
Colombia faces numerous challenges, but we see a path for the government to deliver on its ambitious agenda. The country benefits from an export windfall, given high international prices for oil products – one reason why the Colombian peso has delivered world-beating returns this year (+25% vs the US dollar including carry).4
There is one additional risk to watch. Colombia is highly exposed to El Niño, the climate event expected to alter weather patterns around the world this year. Unlike other parts of Latin America which may see heavy rainfall and flooding, Colombia is more likely to suffer a drought. This could affect agriculture but also electricity, given the country mainly uses hydropower for generation. Blackouts would suppress economic activity while causing prices to spike. Should these El Niño risks materialise, we expect hard currency bonds to continue to outperform the local bond market.
1 Source: Colombia’s Budget Shows Deep Imbalance, Needs Large Adjustment Effort, Fitch Ratings. 8 September 2026
2 Source: ibid.
3 Source: S&P, Moody’s, Fitch Ratings, September 2026.
4 Source: Bloomberg. September 2026.
