Fitch Revises Bogotá & Medellín’s Ratings Outlook to Negative

Fitch Ratings has revised Colombia’s credit rating outlook from stable to negative, while affirming its Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB+’. This adjustment reflects concerns over the nation’s fiscal trajectory and the effectiveness of corrective measures.

Fiscal Performance and Projections

In 2024, Colombia’s central government reported a fiscal deficit of 6.7% of its Gross Domestic Product (GDP), surpassing Fitch’s earlier projection of 5.6%. This shortfall was primarily due to revenue declines and the government’s inability to implement offsetting spending reductions. Consequently, the general government debt-to-GDP ratio rose to an estimated 58% from 53% in 2023.

Fitch has adjusted its deficit forecasts for the coming years, now anticipating a central government deficit of 6.2% of GDP in 2025 and 5.8% in 2026, up from previous estimates of 5.1% and 4.7%, respectively. The agency projects that the general government debt-to-GDP ratio will continue to increase, reaching 62% by 2026, diverging from the projected ‘BB’ median of 55.4%.

Government Response

Finance Minister Diego Guevara acknowledged the fiscal challenges but reaffirmed the government’s commitment to maintaining fiscal sustainability and meeting financial obligations. He projected that the deficit would decrease to 5.1% of GDP this year.

Economic Outlook

Fitch expects Colombia’s economic growth to accelerate to 2.7% in 2025 from 1.7% in 2024, driven by resilient consumer spending and a recovery in investment. Inflation is anticipated to continue its downward trend, reaching the upper band of the central bank’s 3% (+/- 1 percentage point) target by the end of 2025, down from 5.2% at the end of 2024. The current account deficit is projected to widen slightly to 2.1% of GDP in 2025 from 1.8% in 2024, remaining well below its 2022 peak of 6.1%.

Structural Reforms

The pension reform enacted last year is expected to have an annual fiscal cost of 0.3% of GDP. Additionally, a constitutional reform will increase central government transfers to local and regional governments from 27.2% to 39.6% of current revenues over 12 years starting in 2027. These measures may further constrain fiscal flexibility.

External Buffers

Colombia’s central bank has bolstered its external liquidity position, with reserves reaching $61.9 billion USD as of the end of 2024. In April 2024, the International Monetary Fund approved a new two-year flexible credit line of $8.1 billion USD for Colombia, providing an additional buffer against external shocks.

Future Considerations

Fitch indicates that a continued deterioration in Colombia’s debt-to-GDP ratio, driven by persistently high fiscal deficits or weak growth, could lead to a downgrade. Conversely, successful fiscal consolidation that stabilizes the debt ratio, along with reforms enhancing fiscal and monetary credibility, could result in a positive outlook revision.

This outlook revision underscores the importance of effective fiscal management and structural reforms in maintaining Colombia’s economic stability.

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