Sunday, September 9, 2012

Colombian external debt shows a higher cost than it use to be, what is going on?

Colombia has reduced her external debt since 2003 until point to reach 9.9% of her GDP in 2011, nevertheless Colombia pays higher interest rate for her external debt than it used to be. This interest rate used to be lower than Prime Lending Rate before 2001 but after this year Colombia pays more until point to reach a difference between interest rate charged and Prime Lending Rate of 2.9% in 2010, this is a fact to review for government authorities in order to maximize social welfare.  

Author: Humberto Bernal,
Economist,

it can be download @ click

Some of main targets of colombian central government should be to keep an affordable external debt and a fair interest rate for this loan. The first target is reached by Colombian authorities, Colombia in the last 50 years has reached an affordable external debt. This liability reached 4.7% as a share of GDP in 1961, there is a peak in 2003 when it reached 21.7% of GDP, then it declined until 9.9% of GDP in 2011 as figure 1 shows. However the interest rate charged for this liability has not be the optimal in the last four years. If one calculates the implicit cost of colombian external debt (interest divided by total debt, this figure in %) from 1960 to 2001, one realizes that Prime Lending Rate was higher or equal that colombian external debt implicit cost, it means that colombian government did a proper deal in international financial market as figure 2 shows. However since 2003 the cost of this external debt is higher than Prime Lending Rate!!!, it means that Colombians through colombia authorities have been paying a higher cost than it should have be, for instance this difference reached 2.9% in 2010. Therefore it can be a call for local authorities to review their mechanisms through they get this external debt, the best agreements are those that are close to Prime Lending Rate.

Figure 1. Colombian central government external debt as share of GDP 1961-2011
(short and long run debt, %)


Source: Colombian Central Bank and World Bank.


Figure 2. Central government external debt implicit cost and Prime Lending  Rate 1960-2001
(%)


Source: Colombian Central Bank and World Bank.


There can be arguments for charging higher interest rate to Colombia, they are macroeconomic environment, a high risk due to internal war conflict and be in a position of developing country, nevertheless Colombia has improved  them in the last 10 years. In addition, one can calculate colombia’s risk through Risk Premium Rate (this rate takes into accounts exchange rate movements). This premium rate shows an average of 10.4% over last months. If one takes into account a mobil average of 6 moths of this risk premium rate, one can say that 81.7% of this monthly data is between 5.0% and 15.7% as figure 3 shows. Therefore, there have not been an important change through last 10 yeas to paying higher interest for external debt, moreover Colombia reached a better international grade in 2011 (Moody’s pointed  Baa3, S&P pointed BBB- and Fitch pointed BBB-). 

Figure 3. Colombia premium risk rate six months mobile average 1998-2012 
(%)
Source: Colombian Central Bank and World Bank.

No comments:

Post a Comment