Today the Ministry of Finance will present the Medium-Term Fiscal Framework in which it will recount achievements such as growth and address the objectives and steps to follow in terms of challenges such as the level of debt over GDP. César Arias, director of Public Credit, explained that one of the points of this document will be the reduction of the level of debt as well as the less need to seek financing in the markets.
How have you progressed with the foreign exchange hedging process?
Colombia acts preventively to reduce or mitigate the exchange risk in the debt portfolio. From September 2021 to date, we have carried out nine hedging operations on multilateral credits. This has allowed us that US$1,152 million that were previously in foreign currency are now in pesos and at a fixed rate. In other words, we have converted more than $4 billion of our portfolio. The most important thing is that it has had two positive effects, the average rate at which we have set these operations has been 7.43%, well below what is seen in TES bonds, which is 11%, so we are saving about 3.5% rate thanks to this. Additionally, we have set them at an average rate of $3,815, well below this year’s TRM. The average life of this debt is eight years.
Will they do more in the future?
We have a strategy in which we look for the optimal moments both in interest rate and exchange rate. To the extent that conditions remain positive, we will continue with this public debt pesification program.
How is the balance between debt in foreign currency and pesos?
When we entered this administration, between 2018 and 2019, we achieved the maximum level of pesification: 70%. That balance changed in the hardest part of the pandemic and reached 60% in pesos. We have developed two strategies to return to that previous level, such as overweighting the debt in pesos and issuing 70% in pesos, and we see an advance that is added to the hedges, so that now 64% returned to pesos again. We want to continue moving gradually to return to 2019 levels and protect ourselves from currency risk.
When could this account be rebalanced?
It is a gradual process that we are developing. With the strategy that we have, we hope to reach a level of two-thirds in local currency this year. But you have to be very cautious. We are ready to do these operations, but we have optimization criteria to achieve the best rates. We made operations with the TRM was close to $3,700 and when it goes up we take pauses.
In terms of the average life of the public debt, what has happened, taking into account the swap operations?
Perhaps the most important achievement of the four-year period is the extension of the average life of the debt. When you borrow in the short term, you are exposed to constantly refinancing those obligations. This allows us to grow and achieve enough income for the economy to develop and pay our obligations. When we arrived, the average life was in the order of eight years and today it is closer to 10 years. We have increased the average public debt in two years. This compares very well internationally because we are above the OECD countries. This also develops the long-term capital market. The mortgage market, the pension system, life insurance and others benefit. The financing of concession projects was also developed, which we see today as very dynamic with 5G projects.
Today investors, given the level of uncertainty, are preferring bonds of the order of 10 years, so we are at an optimal moment in which, through our issuance strategy, we would like to maintain that level at which we are. We will be pragmatic, if times are good we will lengthen the life of the debt and if not we will cut it.
In general terms, how is the interest rate of the debt that in the case of fixed income TES has had an escalation?
Right now the most important challenge for debt managers in general is the increase in the cost of financing. We add the rise in price, for example, of United States bonds that add to the uncertainty of the electoral process and inflation. The TES interest rate, which at the end of last year could be between 6% and 7%, today is between 10% and 11%. The strategy that we have implemented to counteract this increase is to borrow less. We cannot eliminate indebtedness to the extent that there is a fiscal deficit, but we can take advantage of the increase in tax collection and take advantage of high oil prices that improve income from withholdings. This allows us to reduce the resource needs of the markets.
In February we made a reduction of $30 billion in market placement needs. In other words, we stopped issuing at such high rates and we are working very hard so that tax collection opportunities can further reduce those needs in the presentation of the Medium-Term Fiscal Framework. That is the most important strategy. Above all, we are reducing those financing needs, especially the most expensive ones, which today are in dollars. That is why we continue in the local TES market, which protects us from exchange risk and multilateral and bilateral development organizations that have lower interest rates.
Does this rise in the cost of debt cause you concern?
Of course yes. That is a call for us to continue in the reactivation and continue the tax management that brings us resources through the management of resources that can leverage investment and social spending. That relieves us of debt needs. Second, we can manage to mitigate risks. In the last few months we fixed the rates in dollars and euros for an amount of US$17,000 million and 3,000 million euros that were previously in a floating rate. When we issued that debt, the rate in euros was negative and practically zero in dollars; today we have already benefited from those rates and now they are fixed.
What has happened to the level of debt over GDP taking into account the growth figures?
We are advancing in our goal of reducing public debt as a percentage of GDP. It is good to have used the fiscal space that we had in the pandemic to meet the needs, but we are aware that having increased the debt from 50% to 65% of GDP is a dynamic that we had to reverse. The good news is that this policy of stimulating investment and social spending has allowed us to grow the economy 10.7% in 2021 and 8.5% in the first quarter. This first variable allowed us to lower the debt by one point of GDP to 64%.
We are working so that in the Medium-Term Fiscal Framework we exceed our own reduction goal, which we had said could reach 62.8%, but with the levels of growth and collection we expect to reach a level close to 60%. To the extent that we get closer to the medium-term debt anchor that Congress approved last year at 55%, a gradual and orderly adjustment of public finances is consolidated. We are very confident that in 2022 we are going to approach 60% of debt over GDP and in the Financial Plan that we leave for 2023 we will approach that 55%.
Would this itself lead a new government to seek new sources of fixed income to reduce these needs for debt issuance?
In this administration we leave the house in order and on a favorable trajectory. When we made the previous Fiscal Framework we said that we were going to reach 62.8% of debt over GDP in 2032, thanks to the dynamics of the economy and the management that is done, we have managed to get 10 years ahead of the goal. We even want to advance the task further and reach close to 60% this year, with that we are 5 points away from the medium-term anchor. For this debt to be relieved, it is necessary for the economy to continue to grow steadily, to maintain the favorable collection that is impacted by growth. The reform issues will have to do with the size of the State that the new administration wants to promote. Of course, it is necessary to further strengthen social programs and the effort in public investment is welcome. The extension of the size of the State must be accompanied by new sources of permanent income. That will be an important issue for the new administration.
What does this lower need for debt mean in terms of future emissions that your management is going to make?
We have decided to lean between 70% and 80% on our TES market, which has had good news; When an average of the issues that are made each Wednesday is made, it is seen that the demand for the debt has been close to three times the value that we issued. That helps us to access better financing costs. Colombia is one of the few countries that has received foreign investment in the TES market this year. As of April, we have received close to $5 billion in foreign portfolio investment that helps support this demand. With this, as of May we have close to 40% of our auction program for the entire year. Likewise, we have maximized multilateral financing. We are negotiating with the Inter-American Development Bank, with the Central American Integration Bank, with the governments of France and Germany, to take advantage of these cheaper loans. We are also here so that at the right time we can return to the international bond markets to fulfill our Financial Plan.
There is a not so positive point and it is the cost. This is a raw truth. There is a lot of uncertainty due to phenomena such as inflation, geopolitical tensions, the increase in the interest rate in the United States, the normalization of the monetary policy of the Banco de la República, so the challenge will be those high costs that can remain for several months.
What remains to be done within your management in the remaining days of management?
We want to ensure that debt to GDP comes down and mitigate risks as much as possible. There are two issues that are important to us; One is the first auction of green TES bonds, which we want to do in the first half of the year and which would be the third of a very innovative program, because we are the first emerging economy to carry out this issue in local currency and adopting the twin bond methodology. The other is the launch of our public debt stock market fund that seeks to democratize this market. That seeks to further diversify our debt market.