Colombia Is Borrowing More Money While Promising to Spend Less

Colombia published a decree on September 10 raising its domestic debt issuance by $8 billion — 25 trillion pesos — to fund the 2026 budget. The timing makes this look like a contradiction. The country's new president, Abelardo de la Espriella, took office in August after winning on a platform of fiscal consolidation. He promised to cut the state apparatus by 40%, eliminate 700,000 public-sector jobs, and bring the deficit down to 3.7% of GDP by 2028.

A government promising belt-tightening raises borrowing by $8 billion. What changed?

The answer is two events that happened within days of each other in August. On the 10th, a 7.4-magnitude earthquake struck western Colombia, killing nearly 300 people and toppling buildings across cities including Cali and Pereira. The government pegs early damage at $9.6 billion. On the 15th, after a narrow and contentious election, de la Espriella was inaugurated.

The $8 billion borrowing increase is roughly the size of the earthquake bill. It is not structural profligacy. It is emergency financing for a government that inherited a fiscal hole and a disaster in the same month.

But for investors — particularly those with exposure through emerging-market bond funds — the interesting question is not whether the money is needed. It is whether the market has already moved too far in the other direction, pricing in a fiscal turnaround that may be harder to deliver than the campaign promised.

The fiscal hole behind the headline

Colombia's finances were already fragile before the new president took office. Net debt is projected to reach 61% of GDP in 2026 — the highest level in the country's history. The previous administration under President Gustavo Petro suspended the fiscal rule that caps borrowing, and the deficit widened to nearly 8% of GDP. Two of the three major rating agencies stripped Colombia of investment-grade status in 2025, with S&P cutting the rating to BB-, the lowest the country has ever carried.

There is a gap between what the government says the deficit will be and what independent analysts expect. The finance ministry and IMF target 5.2% of GDP for 2026. Colombia's independent fiscal watchdog, CARF, projects up to 7.4%. That 2.2-percentage-point gap is not a rounding error — it is the difference between a manageable consolidation plan and a crisis.

The new administration faces a deficit that is at least half the size of Colombia's GDP. Then add $9.6 billion in earthquake damage on top. The $8 billion borrowing increase is a down payment on that reality, not a reversal of the reform agenda.

What the market already prices in

Markets reacted aggressively to the election result. The peso appreciated roughly 15% during the year and another 7% after the first round of voting. The 10-year sovereign bond yield fell by approximately 150 basis points. Investors were rewarding the shift from Petro's reform-resistant platform to de la Espriella's market-friendly agenda.

Then a fund separated itself from the crowd. PIMCO built what is now a dominant position in Colombia's local-currency debt market, adding approximately $13 billion during Petro's term — growing from 1.4% to 27% of foreign holdings. Other major investors fled: Singapore's sovereign fund, Franklin Templeton, Japan's GPIF, Vanguard, and PGGM all reduced or eliminated their positions. PIMCO bought the dip while the rest of the world sold. The bet has paid off. Colombian local bonds have returned roughly 38% in dollar terms so far this year, dwarfing the 3.2% average gain across a Bloomberg index of emerging-market local-currency debt.

But there is a difference between the market pricing in a change of government and the market pricing in successful execution. The peso has already moved. The yields have already compressed. The question now is whether the next leg of the story is fiscal repair — or the discovery that the hole is wider than anyone priced.

The execution gap

De la Espriella won by roughly one percentage point in a polarized runoff and does not have an automatic majority in Congress. A 40% reduction in the state apparatus requires legislation, not just presidential decree. The institutional handover between Petro and de la Espriella was already marked by confrontation, with transition meetings halted.

The proposed tax reform aims to raise roughly $8.8 billion by broadening the base and simplifying administration. Eliminating the financial transactions tax and gasoline levies is meant to free liquidity for the productive sector. Resuming fracking and oil exploration could restore investment in Colombia's most reliable revenue source.

None of this is guaranteed. Foreign direct investment fell 33% between 2022 and 2025. Armed militias operate in parts of the country, creating security concerns that dampen investor appetite. BBVA has warned the peso may already overstate the fiscal adjustment that Congress will actually deliver.

Where US investors fit in

Most US retail investors do not hold Colombian government bonds directly. They hold them indirectly, if at all, through emerging-market bond funds. The iShares J.P. Morgan USD EM Bond ETF (EMB) and the VanEck EM Bond ETF (EMBX) both carry sovereign exposure across emerging markets, with Latin America representing a meaningful slice. The Global X TES Colombia Local Bond ETF (GXTESCOL) provides direct, single-country exposure to Colombian peso-denominated sovereign debt — a more concentrated and more volatile bet.

Colombia's story matters to these funds because it illustrates the structural dynamic of EM sovereign debt right now. The asset class is built on the premise that countries will eventually deliver on reform promises, and that high yields compensate for the risk that they won't. PIMCO's Colombia bet is the textbook version of this: buy when the rating is at BB-, when institutional investors are fleeing, and when the political inflection point looks clear. The 38% dollar return this year is what happens when the market swings from despair to hope.

The risk is the same risk that has always existed in EM debt: the swing back. If the fiscal gap proves wider than 7.4%, if Congress blocks the reform agenda, or if the earthquake reconstruction cost doubles the borrowing that's already been planned, the peso and the bonds can move the other way. The same mechanism that delivered 38% can reverse.

What to think about

The $8 billion borrowing increase is a symptom, not a diagnosis. Colombia is borrowing more because it has to — a historic deficit, a fresh natural disaster, and a reform agenda that will take time to produce revenue. The new government is credible on the direction of travel but unproven on execution, and the political obstacles are real.

For investors exposed through EM bond funds, Colombia is one name in a diversified basket. The fund-level risk is diluted, but the underlying dynamic is worth understanding. The question for the position is not whether Colombia needs to borrow — it clearly does — but whether the market's current price for Colombian debt reflects a best-case reform scenario or a realistic one. If it's the former, the risk-reward has already shifted in the other direction.

The market is priced for hope. The test is whether the decree turns into law.