Key Takeaways
Colombia's president-elect plans to reverse a drilling ban that kept output below 750,000 barrels a day, offering investors a rare Latin American oil growth story.
Colombia's president-elect Abelardo de la Espriella plans to reverse a ban on new oil drilling permits, potentially lifting output above 1 million barrels a day and easing a budget deficit that exceeded 6% of gross domestic product last year. The 47-year-old conservative outsider, who earned Donald Trump's endorsement, defeated leftist Ivan Cepeda by less than one percentage point in the June 21 runoff.
"The market takes a lot of comfort from the fact that Restrepo is there," said Nicolas Jaquier, emerging market fixed income portfolio manager at Ninety One, referring to de la Espriella's vice-presidential running mate and former finance minister Jose Manuel Restrepo.
The Global X MSCI Colombia exchange-traded fund surged 15% since de la Espriella led the first round of voting on May 31. Yields on 10-year sovereign bonds compressed almost two percentage points to about 11.6%, while the peso strengthened 10% against the dollar this year despite the country's fiscal strains.
The narrow victory leaves de la Espriella with a fragmented Congress where his Defenders of the Homeland party holds just five seats, complicating the fiscal consolidation needed to stabilize public finances. Outgoing President Gustavo Petro decreed a 24% minimum wage hike in January that will aggravate a budget deficit already exceeding 6% of GDP. Interest costs consume roughly 20% of state revenue, and the central bank has raised rates by two percentage points this year to 11.25% to combat inflation running ahead of Brazil's.
Oil output could climb above 1 million barrels a day
Petro's administration blocked new drilling permits, keeping Colombian petroleum output below 750,000 barrels a day. De la Espriella's pro-investment policies, including potential fracking development, could lift production above 1 million barrels, according to Paul Dmitriev, an emerging markets portfolio manager at Global X ETFs.
War and instability in the Persian Gulf has made Latin America more attractive for hydrocarbon investment, said Alexandre Marc, a senior fellow at France's Institut Montaigne. "Companies will prefer to go this region, which is more stable than the Middle East," he said.
De la Espriella's ideological ally, Argentine President Javier Milei, is also pushing for higher oil output from the Vaca Muerta shale deposit. Brazil's leftist President Luiz Inácio Lula da Silva has similarly bucked his base to encourage offshore drilling and exploration in the Amazon Basin. Colombia's rightward shift under de la Espriella, following 30 years of center-right governance before Petro broke the streak, puts the country in contrast to neighbors Argentina and Venezuela struggling with decades of leftist economic mismanagement.
"Colombia's institutions were able to withstand the challenge of Petro," said Benjamin Gedan, director of the Latin America program at the Stimson Center. "This is not a basket case by any means."
With the central bank keeping real interest rates above 6%, bond investors are getting compensated for risk. Local-currency debt from oil-correlated, liquid sovereigns is rare, said Carlos de Sousa, emerging markets debt strategist at Vontobel Asset Management. "We are overweight Colombia," he said.
De la Espriella takes office Aug. 7. The fiscal adjustment needed — estimated at 4% to 5% of GDP by Ninety One's Jaquier — will test whether the new administration can deliver on market expectations.
This article is for informational purposes only and does not constitute investment advice.
