Standard & Poor’s Affirms Colombia’s BBB Rating but Maintains Negative Outlook

Big-three credit rating agency Standard & Poor’s yesterday affirmed Colombia’s sovereign credit rating at BBB, two notches above junk, and maintained its negative outlook.

In its assessment, the New York-based agency noted that the pessimistic outlook reflects the risk still present in the economy, suggesting that it could downgrade Colombia’s sovereign rating if the country’s fiscal debt burden does not improve within the next 18 months. The nation’s external debt burden remains under pressure as well, even given an adjustment in the current account deficit.

An analyst at Fitch Ratings shared a similar sentiment with Finance Colombia last week. Richard Francis told Finance Colombia that it was too early to make any ratings outlook change now before the agency is able to see the results of the major tax reform the nation passed in the final days of December. He said Fitch will continue to evaluate the macroeconomic conditions and make a rating outlook decision in the next two or three months.

This has all come after Colombian Finance Minister Mauricio Cardenas went to New York last week to meet firsthand with the credit agencies and discuss the reform. Moody’s was the first to comment publicly, noting that it believes that the additional revenue the reform will bring in should allow the country to meet its fiscal targets during the next three years and help stabilize the debt-to-GDP ratio, according to Colombia’s largest bank Bancolombia.

In its assessment, Standard & Poor’s also looked to the tax reform as a step in the right direction. The key component of the overhaul was increasing Colombia’s value-added tax from 16% to 19% in a move aimed at shoring up federal revenues that have been cut drastically since the price of oil plummeted in late 2014.

Colombia’s sovereign credit rating was first put on negative watch by Standard & Poor’s last February. It cited the lack of oil income for the government and a need for fiscal reform. The move incited more urgency for reform from the administration of President Juan Manual Santos, which was only further felt after Fitch Ratings made a similar outlook change in July.

“S&P’s outlook obliges us to remain very firm on the path of fiscal adjustment and the reduction in the current-account deficit,” said Finance Minister Mauricio Cardenas on Twitter last February after Standard & Poor’s revised its outlook to negative.

In other positive news, Standard & Poor’s yesterday highlighted the progress made by the the nation last year. The agency called the country’s now-ratified peace agreement with the Revolutionary Armed Forces of Colombia (FARC) a “significant step” forward.

While many logistical hurdles to implementation remain and the peace accord won’t drastically alter the security conditions of the nation overnight, the end of a conflict that lasted more than a half-century is expected to raise international investor confidence over the long term.

Photo credit: Funky Tee