October 3, 2016 / 2:47 PM / a year ago

UPDATE 3- Colombia peace vote setback rattles markets, ratings agencies

(Adds additional comment, S&P reaction, updates market reaction)

By Nelson Bocanegra and Julia Symmes Cobb

BOGOTA, Oct 3 (Reuters) - 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 rose.

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 assets.


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 many congressmen.”

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)

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