Latin American Capital Markets

312 CLEMENTE DEL VALLEBox 10-2 IGovernment Debt Strategy in ColombiaSince 2000, the Colombian Debt Office has focused on two main goals: development of the domesticgovernment securities markets and extension of the sovereign yield curve. In 2001, thegovernment implemented its first domestic debt swap, which supported these goals. Colombiaexchanged 52 issues due in 2001,2002, and 2003 for 3 issues due in 2001,2004, and 2006.Theswap was successful not only because it diminished market fragmentation but also because it extendedthe average life of the domestic debt portfolio from 3.4 to 4.5 years. The amount exchangedwas almost three times higher than that previously estimated. In fact, because the swapdiminished the cost of funding and provided more liquid instruments, international analysts ratedthe transaction very highly. One of the major achievements of the last two years is that the governmentdeveloped a 10-year fixed-rate bond benchmark, moving away from indexed inflationbonds. Moreover this strategy is helping to create a long-term investment culture, which isneeded to extend the investment horizon of the entire economy.The country has also made efforts to establish a liquid yield curve composed of I -, 2-, 3-, 5-,7-, 8-, and 10-year bonds. The figure below shows not only that the debt team has extended theaverage life of the debt portfolio and diminished its rollover risk but also that it has lowered thecost of access to the market The use of primary dealers has helped in implementing the strategy.Moreover, in the past (1998 and 1999), the country had to rely on higher interest rates toextend the average life of the debt; in 2000, 2001, and 2002, Colombia both extended its portfolioaverage life and diminished interest rates. In large part, the explanation lies in the seriousslowdown of the economy (one of the worst in many decades) and the negative expectations ofthe market participants for the future recovery. However, the proactive debt management strategyhas taken advantage of the situation to improve the structure and cost of the debt portfolio.Much has been done and much remains to be accomplished. One of the main challenges forthe future is to define a clear commitment to a market-oriented funding strategy, moving awayfrom captive sources of funding.Source: Colombian Ministry of FinanceCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub