The election of a maverick candidate endorsed by Donald Trump in Colombia has sent a jolt through the City. Markets opened with a sell-off in emerging market debt as traders priced in the risk of capital flight from a country traditionally seen as a reliable US ally. The new president, a political outsider, has promised to renegotiate trade deals and crack down on what he calls 'colonialist economic interference', a phrase that hardly endears him to the international bond markets.
For the UK, the implications are twofold. First, British companies with exposure to Colombia's oil and mining sectors face an uncertain regulatory environment. Second, and perhaps more significantly, the election signals a broader realignment in Latin America. With leftist governments already in power in Brazil, Mexico, and Argentina, the region is increasingly turning away from the Washington Consensus. The UK's post-Brexit trade strategy, which has sought to deepen ties with the Americas, may need a recalibration.
From a fiscal perspective, the Colombian peso has already weakened 3% against the dollar in early trading. Capital flight is a real risk if the new administration follows through on its threat to nationalise key industries. The Bank of England will be watching closely, as any contagion to other emerging markets could trigger a flight to quality, boosting demand for gilts and suppressing yields. That is cold comfort for UK pension funds, which have been steadily increasing their exposure to Latin American equities in search of higher returns.
The real question is whether the new president can deliver on his populist promises without wrecking the economy. His victory speech was heavy on rhetoric but light on specifics. The markets hate uncertainty, and they are voting with their feet. For the time being, the prudent investor will adopt a wait-and-see approach, but the signs are not good. This could be the beginning of a Latin American debt crisis that will have repercussions far beyond the region.
As ever, the bottom line is this: when politics trumps economics, the markets punish. The question is how severe the punishment will be.