Colombia, which narrowly avoided getting its credit rating cut last year, is again at risk of a downgrade as it struggles to meet fiscal targets and investors tire of overly optimistic forecasts by the government of President Juan Manuel Santos.
Most economists have already concluded that lower economic growth and weak oil prices will make it nearly impossible to meet the deficit target set just last month. Higher debt issuance, costs associated with a peace deal with Marxist FARC rebels and next year's presidential election may exacerbate the situation.
"We believe there is a clear disconnect between reality and the current debt path depicted by the government," said Mario Castro, Latin America strategist for Nomura in New York. He suggested the government was using overly optimistic economic assumptions and aiming to slash public investment in an unrealistic way, given infrastructure needs.
In a bid to calm investor concerns, Finance Minister Mauricio Cardenas will trim 5 trillion pesos ($1.65 billion) from next year's budget. He was due to meet bondholders in New York on Tuesday to discuss the nation's finances.
The government avoided a downgrade by credit rating agencies last year after struggling to fill a financing gap as income slumped along with the price of oil, a key industry. Tax reform helped ward off a cut from BBB investment grade by agencies, even though many investors thought it did not go far enough and that another might be needed.
"It's very likely that before the end of this year we will get a ratings cut," said Juan David Ballen, chief economist at brokerage Casa de Bolsa. "The big question is whether they will lower us to investment grade still, or to speculative grade."
In June, Cardenas instituted a financing plan based on a fiscal deficit of 3.6 percent of gross domestic product this year and 3.1 percent for 2018. He put the price of oil at $51 a barrel in 2017 and $60 in 2018. Brent crude was at $48.95 on Tuesday, up 1.1 percent.
Cardenas targeted growth at 2.3 percent this year and 3.5 percent next, well above the market's forecast of 1.8 percent this year and 2.5 percent for 2018.
Cardenas also called for a 7.8 percent increase in domestic public debt borrowing for 2017, implying a big uptick, deepening market discomfort.
"People didn't look favorably at the government numbers, and some investors have given orders to take profits and go to other markets with better prospects, like Mexico," said a fixed-income investment banker who declined to be identified.
Foreign investors reduced their Colombian bond holdings by 1.23 trillion pesos ($406 million) in June, the first decrease since October and the biggest ever monthly outflow by this type of investor, according the finance ministry.
Foreign investors own $20.7 billion in Colombian domestic public debt, or one-quarter of the total.
The yield on benchmark Colombian Treasury bonds maturing in July 2024 rose to 6.27 percent on Tuesday from 5.87 percent the day before the financing plan was made public on June 14.
Fitch is worried about the bond issuance, warning that Colombia's gross debt burden is close to 50 percent of GDP, nearly 10 percentage points higher than the average for countries with a similar credit rating.
"If they don't do the necessary adjustment, then the debt's going to continue to rise, and that could risk the rating," Richard Francis, director of sovereign ratings for Fitch, told Reuters.
Moody's said weaker growth would also have implications for meeting medium-term fiscal goals.
The government's fiscal wiggle room becomes even tighter, taking into account additional costs generated by the implementation of a peace accord with the Revolutionary Armed Forces of Colombia.
That will cost about $3 billion annually over the next 15 years, Cardenas estimated in a recent interview.
Add the extra social spending that typically happens during election years, and the outlook becomes less rosy.