Colombia’s BBB Credit Rating Under Pressure if Economy Continues to Underperform, Says Fitch Ratings

If Colombia’s economy continues to underperform expectations, the BBB investment-grade credit rating that government officials in Bogotá have worked so hard to preserve may be in jeopardy.

In a report issued yesterday, New York-based credit rating agency Fitch Ratings said that “Colombia’s creditworthiness could be pressured” if low growth remains the norm at the same time that high fiscal deficits undermine the government’s push to first stabilize, and eventually reduce, the nation’s debt burden.

Fitch Ratings, which improved its outlook for Colombia’s ratings from negative to stable in March, has dropped its full-year 2017 forecast for the Andean nation’s economy down from 2.3% GDP growth to just 2.0%.

Fitch points to both low oil revenue and the slow execution of Colombia’s enormous 4G highway overhaul program as reasons why economic growth is failing to hit projections. First quarter expansion came in at a disappointing 1.1%, and various analysts at the central bank, private financial institutions, and research firms alike have expressed pessimism about soon-to-be-released figures for the second quarter.

Fitch’s said that its projection of 3.2% GDP growth in 2018 remains unchanged, however, highlighting that the current hurdles are not cause for full-blown panic. “Monetary easing currently underway will likely boost domestic demand, infrastructure bottlenecks are likely to be resolved beginning in the second half of 2017, and oil production should stabilize,” said Fitch Ratings.

The administration of President Juan Manual Santos has placed a priority on retaining its rating. Last year, after both Fitch and Standard & Poor’s issued concerns about long-term fiscal concerns that could lead to a downgrade, the government worked to pass a tax reform that would help shore up a budget that has been been hammered by the loss of oil revenues since the price of crude began to plummet in late 2014.

In discussing the nation’s rating last year before the reform was finalized, Finance Minister Mauricio Cárdenas told Bloomberg that “this is something we’re going to preserve, and we’re going to introduce all the decisions that are necessary to keep our BBB rating.”

Since the reform, Fitch Ratings has improved Colombia’s ratings outlook from negative to stable. But Standard & Poor’s most recent assessment, issued in January, maintained a negative outlook despite the tax reform already having gone into effect.

In its assessment released yesterday, Fitch Ratings also raised its projection for Colombia’s fiscal deficit rate. The agency now expects the fiscal deficit to reach 3.1% of GDP next year, an increase from its earlier forecast of 2.7%. This strain will be compounded by the country’s debt-to-GDP ratio. The big three rating agency had expected that figure to start to fall in 2018, but its revised assessment now predicts the ratio to merely stabilize next year.

“The changed fiscal targets do not jeopardize the overall trend toward reducing the debt burden in the medium term, but they do highlight risks of fiscal slippage,” said Fitch while highlighting that Colombia’s gross debt burden of nearly 50% of GDP is “nearly 10 percentage points higher than the BBB median.”

Colombia’s main strategy to reel in its fiscal deficit has been cutting expenditures rather than planning for higher incoming revenue. But this could prove difficult given that any strategic financial plans could be disrupted within 12 months as the nation will hold both a presidential and congressional election in the first half of 2018.

The departure of President Santos, whose second and final term in office ends next year, also means that spending initiatives related to Colombia’s peace deal with FARC could be altered, especially if a conservative-leaning head of state hostile to the accord takes office.

Still, fiscal discipline will be required if the federal government wants to hit its target fiscal deficit of 2.2% of GDP by 2019, a figure that is almost a full percentage point below Fitch’s new projection for 2018. “The nearly 1% of GDP adjustment needed to reach the 2019 target is ambitious without additional tax revenue measures and relies on additional spending cuts and anti-tax evasion measures earned by beefing up the tax authority’s capacities,” stated Fitch. This same sentiment applies in relation to Colombia’s hope to get its fiscal deficit down to 1% of GPD by 2022.

Photo credit: Fitch Ratings