nervous but calming down Bloomberg) -- Colombian assets tumbled Tuesday as markets reopened after leftist Gustavo Petro won Sunday’s presidential election on a platform to wean the country off its reliance on raw materials and tax the rich.
The peso slumped as much as 5% before paring losses, while stocks were down 5.6%. The nation’s sovereign dollar bonds were among the worst performers in emerging markets and yields on local debt due 2024 touched a record high. State-run oil company Ecopetrol SA’s securities also took a hit, with stocks down more than 10% and benchmark dollar bonds touching an all-time low.
Investors are ditching Colombian assets as local markets reopened after a holiday amid concern that Petro will transform the country’s business-friendly model. The former guerrilla has pledged to stop awarding new oil exploration contracts, do a complete overhaul of the nation’s pension system and increase tax on the rich and large landowners.
“It is likely that part of the overshoot reverses as Petro sooth the markets and appoints a market friendly finance minister,” said Mario Castro, a strategist at BBVA. “In any case, COP will keep a premium going forward given the possibility of implementation of proposals such as the phase out of oil exploration which could have a negative impact on the external sector of the economy.”
Some of Petro’s plans will be relatively simple to implement, such as firing the management of Colombia’s state oil company. Other proposals, such as taxing wealthy landowners and declaring an economic state of emergency, will be constrained by powerful institutions such as congress and the constitutional court. Petro doesn’t have a majority bloc in Congress.
Petro’s pick for finance minister will be key to appeasing investor concerns. He’s expected to name the nation’s next finance minister this week, according to Ricardo Bonilla one of the president-elect’s top economic advisers on the shortlist for the post.
Former presidential candidate for the centrist coalition Alejandro Gaviria has emerged as the favorite for markets and other candidates include Jorge Garay, Rudolf Hommes, Jorge Ivan Gonzalez, Cecilia Lopez and Luis Fernando Medina. Someone close to Petro’s circle of advisers could trigger further market losses, according to Andres Pardo, chief Latin America macro strategist at XP Investments.
“The peso is already trading as if a market friendly name has been announced,” said Olga Yangol, head of emerging-market research and strategy at Credit Agricole CIB. “Gaviria is a respected economist and served under Juan Manuel Santos, although as a health minister, but nevertheless.”
Petro, who beat construction magnate Rodolfo Hernandez in the runoff by 50% of the votes against 47%, will take office on Aug. 7.
Thierry Larose, a portfolio manager at Vontobel Asset Management, said Colombia has enough checks and balances to prevent “economically irresponsible policies,” and given risk premiums are already wide he expects losses to be limited.
The cost to insure Colombian debt from non-payment with five year credit-default swaps rose as much as 21 basis points during early trading on Tuesday. It’s surged in the past year as Petro dominated pre-election polls, even trading wider than lower-rated Brazil at times.
Peso-denominated bonds particularly may pose a buying opportunity given how cheap they screen, according to Juan Prada, a strategist at Barclays.
“Other LatAm countries have seen relief rallies after assets cheapened with the victory of a leftist president, as markets conclude that reforms will not be implemented or the president moderates his initial platform in to achieve governability,” he wrote in a note Tuesday.