Fitch Ratings Affirms Colombia’s BBB Rating and Stable Outlook

Fitch Ratings held the line on Colombia’s ratings given the country’s “long track record of credible, flexible, and consistent macroeconomic policies.”

In what has come as welcome news to officials in Bogotá, Fitch Ratings today affirmed Colombia’s credit rating at BBB with a stable outlook.

At this time last year, the nation had the same rating but the troubling uncertainty of a negative outlook — something that the administration of President Juan Manuel Santos put serious effort into fixing. Despite already having expended significant political capital by passing a controversial peace accord, the administration still pushed an unpopular tax reform through Congress just before year’s end to replenish a reeling federal budget that has been hit hard in recent years by low oil prices and the resulting lack of revenue from that sector.

Finance Minister Mauricio Cárdenas, in an interview with Bloomberg in Fall 2016, acknowledged that the tax reform, which increased the nation’s value-added tax (VAT) from 16% to 19%, was “a difficult measure that will require a large sacrifice of all Colombians — but it is necessary.” He said it was essential “to introduce all the decisions that are necessary to keep our BBB rating.”

Thus far, the measure has been enough. Fitch Ratings gave Colombia a stable outlook in March, although the New York-based credit rating agency later warned that the rating would be “under pressure” if the economy continued to underperform.

Today’s affirmation, then, is something of a reprieve, with the agency stating that the reaffirmed BBB rating and stable outlook reflect Colombia’s “long track record of credible, flexible, and consistent macroeconomic policies as well as a record of macroeconomic and financial stability.”

But as the Santos administration has been acutely aware, the agency noted that the country’s rating remains “constrained by high commodity dependence, limited fiscal flexibility, and structural constraints in terms of low GDP per capita and weak governance indicators compared to peers.”

In layman’s terms: Colombia has made it through 2017 but it isn’t completely out of the woods yet. While Colombia’s 2.0% growth rate in 2016 outpaced the bulk of its regional peers, things have not improved in 2017. That rate, which was the country’s lowest GDP expansion in eight years, is expected to come in even lower this year, with Fitch projecting 1.9% GDP growth for 2017.

Even with low growth, Colombia’s fiscal policies have allowed it to reign in its account deficit, which fell from 6.4% in 2015 to 4.3% in 2016. Fitch expects it to fall further to 3.8% by the end of this year. Fitch also says it considers the government’s 2018 target account deficit of 3.1% of GDP to be “credible based on expenditure restraint, especially in capital expenditures, as well as additional revenues from the tax reform that passed in December 2016.”

Inflation has also taken a positive turn. The rate has now fallen back to near the central bank’s target range of between 2%-4% despite hitting a 16-year high of 8.97% in mid-2016.

In other good news, the government’s general debt-to-GDP ratio “has stabilized at close to 47%,” but this remains well above the BBB-rated median level of 42%. Fitch believes that “further deficit narrowing, as stipulated by the ‘structural balance rule,’ will prove difficult without additional revenue measures beyond 2018.” It added that “further fiscal measures would be needed to begin to reduce the government’s debt burden…and to increase fiscal room to meet future shocks.”

Colombia’s external debt is also problematic. Fitch does believe it will continue to fall, albeit slowly, from the high of 262% of current account receipts. Still, as it stands, these “metrics compare unfavorably to peers,” stated Fitch.

The full list of ratings assessments for Colombia by Fitch Ratings are as follows:

• Long-Term Foreign-Currency IDR: BBB, outlook stable
• Long-Term Local-Currency IDR: BBB, outlook stable
• Short-Term Foreign-Currency IDR: F2
• Short-Term Local-Currency IDR: F2
• Country Ceiling: BBB
• Issue ratings on long-term senior unsecured foreign-currency bonds: BBB
• Issue ratings on long-term senior unsecured local-currency bonds: BBB