UPDATE 3-Colombia to reduce overseas debt but wont prepay bonds

Tue Feb 5, 2013 3:44pm EST

* Efforts to stem peso gains have muted effect

* Strong currency hurts exporters, manufacturers

* Central bank, govt have intervened in market

By Helen Murphy and Nelson Bocanegra

BOGOTA, Feb 5 (Reuters) - Colombian Finance Minister Mauricio Cardenas said on Tuesday the government plans to reduce external debt to help curb gains in the peso but ruled out prepaying existing foreign bonds.

Cardenas clarified his earlier comments that he was considering prepaying foreign debt by using budget savings or cash freed up by lower-than-anticipated domestic bond servicing costs in a bid to weaken the peso, which he said was about 10 percent over valued against the dollar.

A rekindling in risk appetite among investors and continued low interest rates in developed countries have prompted many experts to predict a bumper year of inflows to higher-yielding emerging markets, potentially boosting exchange rates further.

"We will not pay bonds that have already been issued," Cardenas said in an interview on state radio, referring to prepayment of foreign bonds.

"We can take on less debt in the exterior and dedicate additional resources to amortize existing debt. But prepaying existing bonds isn't a good idea because if you say you are going to pay the bonds it increases the price."

Colombia had external public sector debt worth $45.5 billion as of October 2012, according to central bank data, and has multilateral loans with institutions, including the World Bank.

Peru, which is also struggling with hot money inflows, said on Dec. 22 it would prepay up to $1.5 billion in debt in 2013 to try to stem the sol's appreciation.

Such a measure would help ease gains in Colombia's peso, which despite efforts by the government and central bank has remained stubbornly strong.

The peso gained 9 percent against the dollar last year. In 2013 it has retreated only slightly.

In an attempt to prevent further strengthening, the central bank cut its overnight lending rate a quarter percentage point last month to 4 percent and increased purchases of dollars on the spot market to $30 million a day from $20 million previously.

In Tuesday trade, the peso strengthened 0.05 percent to 1,786.98 pesos to the dollar. So far this year, it has softened barely 1 percent against the U.S. currency.

Even with new measures, economists reckon the peso will not react much as its strength comes mostly from record dollar flows into the economy as security in the Andean nation improves.

Improved security has opened up many parts of the country to more investment from oil and mining companies, whose dollars are a key contributor to the peso's strength.

A strong peso hurts exporters who receive dollars for sales but pay costs in pesos while local manufacturing suffers from an influx of cheaper imports.

The government has vowed to keep dollars from overseas debt sales abroad and asked state-run oil company Ecopetrol not to take on dollar debt for financing. It also uses excess funds from the Treasury to buy dollars.

In its regular assessment of Colombia's economic health, the International Monetary Fund said on Monday the peso appeared over-valued on a real exchange-rate basis by between 1 percent and 8 percent, though the strength also could reflect improvements in economic fundamentals.

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