This content is from: Local Insights

Colombia: Foreign loans in pesos

A new regulation in Colombia has the potential to dramatically improve the Colombian financing landscape. The Colombian Central Bank recently began allowing foreign entities to lend Colombian pesos to local entities. Before that, foreign loans could only be extended in foreign currency with the corresponding foreign exchange risk (subject to the ability of arraigning for peso-linked facilities).

The new regulation could not have happened at a better time. Considering the high financial resources demand (due to the most ambitious infrastructure programme in Colombian history), a rather small local financial system, strict capital solvency requirements and limited foreign currency income business, Colombia desperately needed new financing sources to retain its economic growth.

Foreign entities interested in extending loans to Colombian counterparties should open a local bank account (cuentas de uso exclusivo) that can be funded by (i) foreign currency converted to Colombian pesos through traditional foreign exchange channels; (ii) disbursements of local loans obtained from local entities (eg local banks); (iii) proceeds from issuances in the local capital market (eg bond issuances); (iv) proceeds from investment portfolios (eg the selling of equity investments in Colombia); (v) capital and interest payments of the loans extended to local entities; and, (vi) interest accrued by the resources deposited in the account. In turn, the resources deposited in the bank account can be used for (a) disbursing or paying loans; (b) portfolio investment; and, (c) other payments related to the loans (eg fees).

The foregoing represents a completely new range of opportunities. Local entities will have more available resources to finance their investments, without bearing foreign exchange risks or implementing expensive risk mitigation mechanisms. The new competition may reduce the cost of financing in Colombia, making the development of new industries and businesses easier. Finally, this may develop the incipient secondary market for Colombian loans. The new regulation grants foreign players access to Colombian pesos to purchase bank loans. This may contribute to the rebalance of local banks' loan portfolios and use scarce resources in a more efficient and profitable manner.

However, these opportunities also come with interesting challenges, such as: (i) foreign and local companies should carefully consider the applicable law for the loan agreements; (ii) foreign exchange procedures should be streamlined to avoid potential sanctions and contingencies; (iii) the Colombian government will likely clarify how withholding tax will apply to these loans, since this is one of the main disadvantages of foreign loans as compared to local loans; and most importantly, foreign entities should prepare comprehensive business models and innovative legal structures to ensure that these transactions will be profitable and properly secured and hedged.

Carlos Fradique-MéndezCésar Rodríguez

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