Colombia’s Strategic Shift to Euro-Denominated Debt: Implications for Emerging Market Investors

Colombia’s recent foray into euro-denominated debt issuance marks a pivotal moment in its public finance strategy, reflecting broader trends in emerging market (EM) debt markets. As global investors grapple with shifting currency dynamics and macroeconomic uncertainties, Colombia’s move to diversify its external debt portfolio offers both opportunities and risks for EM investors. This analysis explores the implications of Colombia’s strategic shift, focusing on currency diversification and fiscal risk management in EM debt portfolios.

A Strategic Pivot: From Dollar Dominance to Euro and Swiss Franc Diversification

For years, Colombia’s external public debt has been overwhelmingly U.S. dollar-denominated. In 2018, 93.6% of its public and publicly guaranteed (PPG) debt was in USD, with Euros accounting for 4.18% and Japanese Yen 0.53% [1]. However, the 2025 Euro bond issuance—Colombia’s first since 2016—signals a deliberate effort to reduce reliance on the dollar. According to a Bloomberg report, this shift is driven by the weakening U.S. dollar, geopolitical uncertainties tied to Donald Trump’s return to the White House, and a broader appetite for diversification among borrowers and investors [2].

Complementing this move, Colombia is also seeking up to $10 billion in Swiss franc loans to refinance higher-cost liabilities, including peso- and dollar-denominated bonds [2]. This dual approach—leveraging both Euros and Swiss francs—aims to stabilize debt servicing costs and mitigate currency volatility risks. By 2025, analysts project that USD’s share of Colombia’s external debt could drop to 85%, with Euros and Swiss francs collectively accounting for 15% of the portfolio [3].

Currency Diversification: A Hedge for EM Investors

The Euro bond issuance aligns with a global trend of EM borrowers tapping euro markets. As noted by Mitrade, euro-denominated debt deals surged in 2025 as investors sought alternatives to the dollar amid inflationary pressures and central bank policy shifts [4]. For EM investors, this diversification offers critical benefits.

First, it reduces exposure to U.S. dollar volatility, which has been exacerbated by Federal Reserve rate hikes and geopolitical tensions. Second, Euros provide access to a broader investor base, including European institutional investors and pension funds, which may offer more stable funding compared to dollar-centric markets. Third, the inclusion of Euros and Swiss francs in Colombia’s debt mix introduces non-correlated assets to EM portfolios, enhancing risk-adjusted returns. According to BlackRock’s 2025 Fall Investment Directions, EM bonds are increasingly viewed as strategic tools for diversification, particularly in an era of divergent global monetary policies [5].

Fiscal Risk Management: Balancing Debt Stability and Growth

Colombia’s fiscal landscape in 2025 is shaped by a delicate balance between debt sustainability and economic growth. As of 2024, gross public debt stood at 61.3% of GDP, driven by fiscal deficits and a weaker peso [6]. However, projections indicate a stabilization by 2025, supported by an improving primary fiscal balance and a narrowing current account deficit [6].

The Euro and Swiss franc issuances are designed to address two key risks: currency mismatch and refinancing costs. By aligning debt currencies with Colombia’s trade and investment flows, the government aims to reduce exchange rate exposure. For instance, Swiss francs, which are often used in regional trade and remittances, could offset peso depreciation risks. Meanwhile, Euros, with their lower yields compared to dollars, offer cost advantages in a high-interest-rate environment.

Investment Implications: Yield, Diversification, and Strategic Positioning

For EM investors, Colombia’s 2025 Euro bond presents a compelling case. The MSCI Colombia Index, trading at a depressed 0.84x book value and offering an 8.32% dividend yield, underscores the country’s appeal as a deep-value EM play [7]. Additionally, the bond’s unsecured, unsubordinated structure—backed by Colombia’s full faith and credit—provides a credit profile aligned with BBB ratings from Morningstar DBRS [8].

However, risks remain. The success of this strategy hinges on Colombia’s ability to maintain fiscal discipline and avoid overexposure to low-yield currencies. Investors must also monitor the impact of global liquidity shifts, particularly if the Fed’s rate cuts trigger capital outflows from EM assets.

Conclusion: A Model for EM Debt Strategy

Colombia’s strategic shift to Euro- and Swiss franc-denominated debt exemplifies the evolving priorities of EM borrowers: diversification, cost efficiency, and risk mitigation. For investors, this move offers a unique opportunity to access high-yield, non-correlated assets while navigating the complexities of a fragmented global market. As emerging economies continue to innovate in debt structuring, Colombia’s approach may serve as a blueprint for balancing fiscal prudence with growth ambitions.

Source:
[1] Colombia CO: Currency Composition of PPG Debt: Multiple Currencies [https://www.ceicdata.com/en/colombia/external-debt-commitments-and-currency-composition/co-currency-composition-of-ppg-debt-multiple-currencies]
[2] Colombia Eyes 'Unprecedented' Franc Loans to Ease Debt Cost [https://www.bloomberg.com/news/articles/2025-07-03/colombia-sees-unprecedented-swiss-franc-loans-easing-debt-cost]
[3] 424B3, Republic of Colombia Euro Bond Issuance [https://www.sec.gov/Archives/edgar/data/917142/000119312525080780/d876861d424b3.htm]
[4] Euro Debt Deals Surge in Emerging Markets as Dollar Loses ... [https://www.mitrade.com/insights/news/live-news/article-3-972437-20250720]
[5] 2025 Fall Investment Directions: Rethinking Diversification [https://www.blackrock.com/us/financial-professionals/insights/investment-directions-fall-2025]
[6] Colombia: Staff Statement [https://www.imf.org/en/News/Articles/2025/04/18/pr25116-colombia-staff-statement]
[7] Global X 2025 Emerging Markets Outlook [https://www.globalxetfs.com/articles/global-x-2025-emerging-markets-outlook/]
[8] Morningstar DBRS Confirms Republic of Colombia at BBB [https://dbrs.morningstar.com/research/434944/morningstar-dbrs-confirms-republic-of-colombia-at-bbb-low-stable-trend]