Challenges in Colombia: “Fitch Does Not Rule Out Further Negative Rating Actions Among Colombian Banks”

Fitch Ratings released its Latin American Sovereign Overview report this week, and it reflects the weakness in economies throughout the region. While Colombia is looking at much higher growth, relatively, than most of its peers, the current climate in the country is particularly difficult to navigate for the financial services sector.

“Among major Latin American economies, excluding Brazil, Colombian banks are facing the most-challenging environment, driven by the economic slowdown, exchange-rate volatility, and a financial profile that is not particularly robust,” said said Alejandro Garcia, managing director of Latin American financial institutions for Fitch, in a recent video. “Tight capital metrics recently drove a downgrade of Colombia’s two largest banks.”

In addition to the downgrades suffered by Bancolombia and Banco de Bogotá, Garcia says that most other major and medium-sized banks also have a negative rating outlook that is tied to the negative outlook it has put on Colombia’s sovereign rating.

“Fitch does not rule out further negative rating actions among Colombian banks, either driven by a potential sovereign downgrade or capital metrics remaining at tight levels,” said Garcia. “Fitch is not particularly optimistic about the potential near-term trend of capital adequacy metrics, especially if local regulators do not vigorously address the widening difference between local and global capital standards.”

Latin America as a Whole

As in Colombia, banks throughout the region are still facing many headwinds. “Latin American banks have faced a challenging environment in 2016, a trend likely to continue in 2017 despite some early signs of stabilization,” said Garcia. “The current weak phase of the economic cycle remains the key challenge for most banks, coupled with the impact of global shocks and volatility in addition to country-specific risks.”

Generally, for economies across the region, Fitch continues to project a recession in 2016, with negative growth in Brazil continuing to drag down Latin America as a whole. Argentina, Venezuela, and Ecuador are also expected to finish 2016 in recession, with Venezuela set to contract again in 2017.

Otherwise, higher commodity prices will lead the region to a recovery in 2017. For specific countries the experience may differ, however, with local uncertainties still looming almost everywhere in addition to the wider threats.

“Downside risks could come from weaker external demand and commodity prices, a faster deceleration in China, and increased international financial volatility,” said Fitch in a statement. “Inflationary pressures are expected to recede in the coming year and inflation expectations are improving for 2017 in several countries.”

Inflation in Colombia

This is where the positive news comes for Colombia. Its inflation, again and again, has hit — and then exceeded — a 16-year high throughout the year. The key culprit was food prices. This was driven by a severe El Niño cycle that led to poor agricultural output as well as a trucker strike — paro camionero — that crippled key sections of the transportation network for 45 days early this summer.

But inflation has already turned around. Seeing these results, and confident that its 11 straight months of interest rate hikes were enough, the central bank is optimistic that inflation will continue to fall from its high of 8.97%.

Banco de la República believes that it will be back down to less than half of that figure before the end of 2017, nearly in line with its target range of between 2% to 4%. Private banks and analyst groups see a similar, if slightly less rosy, course correction that will led to a significant drop even by the end of 2016.

Colombia’s Negative Outlook

The rally in oil prices is also great news for the Colombian economy as a whole and the federal budget specifically. There has been a large hole in public revenues since the per-barrel cost began plummeting two years ago. If officials in Bogotá can get a little help from rising returns on crude exports and also push through tax reform before the end of the year, the biggest fears of the rating agencies can likely be averted.

But much damage has already been done this year. After getting hit by Fitch earlier this summer, Colombia is now one of five Latin American sovereigns to which =the agency has assigned a negative outlook. The others are Brazil, Costa Rice, Ecuador, and Suriname.