(Bloomberg) -- For most of the time since Donald Trump won office, Colombia appeared safely out of his crosshairs. Preoccupied with the likes of Mexico and China, he barely uttered a word about the country, giving traders in Bogota the confidence to steadily bid up the peso and stock prices.
The calm was shattered at 1:29 p.m. on Sunday, when Trump suddenly unleashed, via social-media, an economic war on Colombia — 25% tariffs, sanctions, extraordinary cargo inspections, travel restrictions — as retribution for its refusal to receive deportees.
That Colombia quickly backed down — President Gustavo Petro accepted most of Trump’s demands later that evening — and prevented the broad market collapse many feared is to a certain extent immaterial. What stuck with investors across emerging markets is that with an emboldened Trump aggressively pushing his America First agenda at home and abroad, no trade is now truly safe. Any asset anywhere in the world, and especially those found in financially fragile developing nations, can be buffeted by a tweet or an off-hand remark at any moment.
The peso may have been spared by the Sunday-night truce but it still sank enough — falling Tuesday after slumping as much as 2% at the open on Monday — to add to speculation the central bank will hold off on cutting interest rates this week. A reduction, aimed at bolstering a sputtering economy, had been seen as all but certain just a few days ago.
“The risk is global and that’s how the US wants it to be,” said Ricardo Penfold, managing director at Seaport Global in New York. The market should be pricing in a “Trump sanctions risk premium.”
Of course, Trump’s unconstrained cudgeling shouldn’t be particularly surprising considering his first four years in office. But this time around he’s arguably more strategic and governments across the globe are in a weaker position after their budgets were upended by the covid pandemic — when they were forced to borrow heavily.
Emerging markets are already contending with a strong dollar and questions over where the Federal Reserve will take rates. Stocks and currencies from the developing world have taken a leg down since Trump won office and investors have been pulling billions of dollars from EM-dedicated funds.
With markets already teetering, Trump can easily spark a rout with an off-hours social media post or comment.
“We have to take Trump’s rhetoric seriously,” said Olga Yangol, head of emerging-markets research and strategy at Credit Agricole. “Colombia’s example demonstrates that a tariff announcement can come at any moment.”
Rate Decision
For Colombian policymakers, the spat, while short-lived, adds to factors they will weigh when they meet Friday. The central bank had been reducing rates steadily to 9.5% from a peak of 13.25%.
“They have room to cut despite a pause by the Fed,” said Alejandro Arreaza, an economist at Barclays. “The issue is whether political factors will force them to halt.”
Going into the dispute, Colombia’s situation was better than many. Debt as a percentage of gross domestic product is lower than most emerging-market peers and the peso was one of few to strengthen against the dollar since Trump’s win in November, gaining 4.5% since the election.
But Petro — already contending with a widening budget deficit and sluggish economy — seemed loathe to pick a fight with the US, its longtime political ally and the biggest buyer of its exports, like coffee, oil and flowers.
In a social media post Sunday, he said Colombia needs to open itself to the world — rekindling an oft-mentioned theme by developing-world leaders of diversifying away from the US.
But just nine hours after Trump’s threat, Petro changed tack on the deportations. By Tuesday, he’d sent a Colombian military plane to the US to pick up 91 nationals.
The episode underscores how much influence Trump can wield over a country with strong ties to the US.
“Colombia is likely to seek to diversify its commercial and political allies,” said Sergio Guzman, director of Colombia Risk Analysis. “But its dependence on the US was highlighted by Trump’s forceful deterrent actions and threats.”
--With assistance from Vinícius Andrade and Oscar Medina.