(Adds additional comment, S&P reaction, updates market
By Nelson Bocanegra and Julia Symmes Cobb
BOGOTA Oct 3 Colombian financial markets slid
on Monday on concern that voters' rejection of a peace deal with
Marxist rebels could jeopardize tax reforms aimed at
compensating for lost oil income, putting pressure on the
nation's credit ratings.
Colombians voted narrowly against a pact with the
Revolutionary Armed Forces of Colombia (FARC) in Sunday's
referendum, plunging the nation into uncertainty.
The Colombian peso was down 1.7 percent, trimming
steeper early losses, while locally-denominated Treasury bonds
known as TES due in July 2024 fell 7 percent.
MSCI's iShares Colombia Capped ETF was down 3.5
percent, and Colombian U.S. dollar bonds opened multiple points
lower on Monday. The Colombian Capitalization index
was down more moderately, slipping 0.8 percent, with belwether
Ecopetrol actually up slightly as oil prices
The referendum result dented President Juan Manuel Santos'
political standing, just a week before the government planned to
unveil a tax reform that looks to hike revenue by between 1
percent and 2 percent of gross domestic product.
Even though it still has a legislative majority, the
government may now be forced to water down the tax proposals due
to a newly-emboldened opposition.
"The outcome was definitely a surprise and markets have
backed up a bit and the currency has come off sharply," said
Kevin Daly, a member of Aberdeen Asset Management's investment
committee. "But this was not a Brexit situation. This was not a
one-off vote and there is going to be some form of negotiation
but at this stage it's anyone's guess how long this will take."
"There are expectations that we will get some form of tax
reform that jeopardizes the fiscal target and that increases the
risk of a rating downgrade," he added.
Latin America's fourth largest economy has been hard hit by
the global fall in crude oil prices. Oil sales had provided a
fourth of the nation's income and some said they would have
greater bearing on its economic outlook than the peace setback.
"Colombian growth and development has done well historically
and the recent weakness is driven mostly by low oil prices,"
said Michel Del Buono, managing director and global strategist
at Makena Capital Management, which oversees $20 billion of
RATINGS AGENCIES WATCHING
The tax reform is meant to expand the country's limited
collection base and cut down on evasion.
Details have not yet been released, but sources had said it
was likely to include a hike in value-added tax.
Ratings agencies, which have said tax reform is crucial to
Colombia's fiscal health, took no immediate moves, but Moody's
said the referendum defeat was "negative" for Colombia's credit
profile, while S&P said the result could complicate the
government's effort to tackle its accounts.
Colombia's 5-year credit default swaps were at 177 bps
compared with Friday's 170 bps close, the highest since Sept 27.
Analysts predict Colombia's economy is likely to grow 2
percent this year, below the 3.1 percent expansion in 2015 and
under the government's initial estimates.
Santos had promised a "peace dividend" of up to 1.5 percent
additional annual growth if the deal was approved, though
analysts had expressed skepticism that the benefits would be
quite so pronounced.
Colombia's Congress will still approve the tax legislation
before the end of the year, Citi said in a note, but "not having
a signed peace deal makes justifying tax increases harder for
Capital Economics said Sunday's vote would complicate the
remainder of Santos' presidency, which ends in August 2018, and
hurt the economy in the medium term.
"While it is a significant blow to the economy's medium-term
prospects, the deal was never likely to radically change the
near-term economic outlook," it said.
The shock result marked another miscalculation by pollsters
in a year of surprise democratic decisions like Britain's
"Brexit" vote to leave the European Union, analysts said.
"There is more behind the surprise referendum outcome in
Colombia than people looking for a better deal with the FARC,"
said Mohamed El-Erian, chief economic adviser at Allianz.
"Deep-rooted anger, an asymmetrical turnout, and yet another
referendum miscalculation by 'expert opinion' seem to also have
played a role."
A peso fall was to be expected, other analysts said, given
the currency's rebound since February.
(Additional reporting by Bruno Federowski in Sao Paulo, Dion
Rabouin and Jennifer Ablan in New York and Sujata Rao and Marc
Jones in London; Writing by Christian Plumb; Editing by Paul
Simao and Alistair Bell)