Fitch Ratings Upgrades Colombia’s Sovereign Rating to Stable from Negative; Bogotá and Medellín Outlooks Also Upgraded
Fitch Ratings has affirmed Colombia’s sovereign rating at BBB and upgraded its rating outlook from negative to stable. This returns the nation to the position it was at the beginning of 2016 before Standard & Poor’s and Fitch both changed their Colombia outlooks to negative.
In its analysis, Fitch highlighted the country’s improving macroeconomic imbalances, current account deficit reduction, falling inflation rate, and “diminished uncertainties surrounding Colombia’s fiscal consolidation path due to passage of tax reform measures in December 2016.”
The controversial tax reform was the largest push last year by the administration of President Juan Manuel Santos to improve the country’s fiscal standing. Finance Minister Mauricio Cárdenas noted that retaining Colombia’s investment-grade rating for the long-term was a top priority, making Fitch’s recent outlook upgrade the course change that officials in Bogotá had been seeking.
In Standard & Poor’s most-recent assessment, two months ago in January, the agency similarly affirmed its BBB rating, at two notches above junk. It was not confident enough, however, to change its outlook and has retained a negative view on the country.
Colombia’s Economic Indicators
Fitch Ratings relatively rosier report highlights what it called Colombia’s “faster than expected” adjustment, overseeing a current account balance that fell to 4.4% of GDP in 2016 after ending 2015 at 6.5%. The New York-based ratings agency projects further improvement this year with a drop to 3.6%.
Furthermore, Fitch is leaning on the reputation of the Ministry of Finance and the central bank to withstand potential headwinds and bring inflation back down closer to its target level of between 2%–4% by the end of 2017. The country also has international reserves of some $47 billion USD (nearly nine months of current external payments) and the backstop of a $11.5 billion USD line of credit with the International Monetary Fund.
“Colombia’s track record under its inflation-targeting regime, exchange rate flexibility, and sound banking system have underpinned its capacity to absorb external shocks and maintain broad macroeconomic and financial stability,” said Fitch Ratings.
On the negative side, the agency noted that Colombia’s central government deficit has increased, rising from 3% of GDP in 2015 to 4% in 2016. While stressing that cost-containment measures will likely remain necessary for the medium term, even following the extra revenue that the tax reform will provide, Fitch projected this number to fall to 3.3% in 2017.
More troubling is a gross general government debt that reached nearly 50% in 2016 — nearly 10 percentage points above the median level for Fitch’s BBB-rated economies — due to the sharp and extended depreciation of the Colombian peso. Fitch sees some stabilization ahead but believes the nation’s debt will remain above the BBB median.
It also listed the following elements as downside risks for the Colombian economy: Failure to reduce the fiscal deficit and stabilize the government’s debt burden; a re-emergence of large external imbalances that lead to continued increase in external debt burden; or a persistent period of low economic growth that undermines fiscal performance and support for the government’s macroeconomic policy framework.
But, as suggested by the outlook upgrade, the overall sentiment on Colombia from Fitch Ratings is much more positive at this point than it has been during the previous nine months. “The BBB rating balances Colombia’s flexible and credible policy framework, improved external buffers and a record of macroeconomic and financial stability against high commodity dependence, limited fiscal flexibility and structural constraints in terms of low GDP per capita and weak governance indicators,” said Fitch in its analysis.
Bogotá and Medellín Outlooks Upgraded to Stable
Today, Fitch followed suit on its recent upgrade to Colombia’s sovereign rating with the same actions for the cities of both Bogotá and Medellín. Both have had their BBB ratings affirmed and their outlooks improved from negative to stable.
“Bogotá has a solid operating performance and manageable debt levels, including a significant increase in debt to cover its development plan,” said Fitch it it analysis. “Fitch’s ratings reflect the district’s strong socioeconomic profile and weight in the national economy in terms of GDP contribution as positive factors.”
It sees the main risk for Bogota as being able to meet the capital’s many social and infrastructure needs, particularly those related to transportation.
For Medellín, Fitch credits the city for its significant cash flow, “dynamic collection” of municipal taxes, and the financial support it receives from Empresas Públicas de Medellín. But like Bogotá, it has infrastructure challenges, on top of debt, that present downside potential.
“The main risks or limitations for Medellin are a manageable, but still higher, debt burden, political risk associated with the public sector and quality of the administration, and high infrastructure needs,” said Fitch Ratings.
Full Ratings Breakdown
Colombia
Long-Term Foreign-Currency Issuer Default Rating: BBB
Long-Term Foreign-Currency Issuer Default Rating Outlook: Stable
Long-Term Local-Currency Issuer Default Rating: BBB
Long-Term Local-Currency Issuer Default Rating Outlook: Stable
Country Ceiling: BBB+
Short-Term Local Currency IDR: F2
Short-Term Foreign-Currency IDR: F2
Senior Unsecured Foreign-Currency Bonds: BBB
Senior Unsecured Local-Currency Bonds: BBB
Bogotá
Long-Term Foreign-Currency Issuer Default Rating: BBB
Long-Term Foreign-Currency Issuer Default Rating Outlook: Stable
Long-Term Local-Currency Issuer Default Rating: BBB
Long-Term Local-Currency Issuer Default Rating Outlook: Stable
Bogota $300 million USD equivalent, 9.75% Colombian peso-denominated notes due 2028: BBB
Medellín
Long-Term Foreign-Currency Issuer Default Rating: BBB
Long-Term Foreign-Currency Issuer Default Rating Outlook: Stable
Long-Term Local-Currency Issuer Default Rating: BBB
Long-Term Local-Currency Issuer Default Rating Outlook: Stable