What Could Make Dollar-Funding an Attractive Option in Colombia? 1

What Could Make Dollar-Funding an Attractive Option in Colombia?

Peso funding continues to be attractive in Colombia

There’s a perception that credit conditions tightening in Colombia (GXG) (ICOL) will cause borrowers to begin to look towards dollar funding. However, SMBC Nikko Securities America sees peso funding continuing to be attractive and sufficient, at least for now. If growth in Colombia starts moving up to around 3 or 4%, such that demand for credit becomes more robust, then we could see the constraint showing up, said Arthur Rubin, Head of Latin America (ILF) Debt Capital Markets at SMBC.

What could make dollar-funding at attractive option?

  1. The need for international funding should arise only when we see sustained high levels of economic growth in the region, which is when we would also witness a rise in local funding cost, and credit spreads between local and international funding, tightening.
  2. Moreover, with the markets already pricing in the two 25 basis point increases by the Fed this year, it would only take an unexpected occurrence, to make dollar-funding attractive for countries like Colombia (ICOL), Peru (EPU) and Chile (ECH).

For now, dollar-funding isn’t as compelling an option

For now, credit growth in the corporate sector in Colombia has been declining, keeping any stress on bank liquidity at bay. We are still seeing a number of Colombian peso bonds being floated. Large borrowers such as utilities and consumer firms are able to secure peso funding domestically. Moreover, local-currency funding continues to prove more attractive in cost terms as compared to dollar-funding.

“The need to diversify funding sources in both Peru and Colombia, hasn’t really been there,” said Rubin. “With domestic capital markets and local-currency funding being able to suffice the funding needs arising in Colombia and Peru as of now, going abroad for dollar-funding isn’t as compelling an option.”