Fitch Ratings Affirms Colombia’s BBB Credit Rating with a Stable Outlook

Big three credit rating agency Fitch Ratings today affirmed its sovereign credit rating for Colombia at BBB, two notches above junk, with a stable outlook.

This is unchanged from the New York-based agency’s previous rating for the country and represents positive news for a government whose budget challenges led a rival rating agency, Standard & Poor’s, to downgrade Colombia’s long-term rating foreign currency rating to BBB-, one level above junk, in December 2017.

The third large global agency, Moody’s Investor Services, has most recently rated Colombia at Baa2, its equivalent to Fitch Rating’s BBB, or two notches above junk. Moody’s did, however, assign Colombia a negative outlook in February.

The BBB affirmation by Fitch Ratings hits during a week when oil prices, the Andean nation’s largest export, rose to a level not seen in nearly four years.

The collapse of oil prices toward the end of 2014 has been the biggest culprit in Colombia’s economic slowdown, contributing to a budget crunch in Bogotá as gross domestic product (GDP) only expanded by 2.0% in 2016 and a paltry 1.8% in 2016, which was the lowest level since 2009.

Colombian Finance Minister Mauricio Cárdenas highlighted the fact that the country has been able to maintain a BBB rating with Fitch Ratings dating back to 2013 and throughout this downturn. To him, managing to not lose this coveted rating — something the government fought to retain when it rose taxes in the final days of 2016 — signifies that the overall investment climate and reputation of Colombia has improved.

“Fitch sees a clear, stable horizon,” said Cárdenas in a statement. “This confirms that an orderly adjustment was made, that the economy is stable, and that the rating agencies now consider Colombia a better place to invest, with lower country risk, than it was in the past.”

Among the factors cited by Fitch Ratings in affirming the rating are Colombia’s debt — which still presents some cause for worry but is in line with BBB peers — and an inflation rate that has moderated over the past 18 months. In April, inflation fell again, albeit slightly, to 3.13%, which is now well within the 2%-4% target range of the Colombian central bank.

The agency also again highlighted its concerns about whether the current account deficit can continue to drop fast enough to hit the rate targets set forth in the country’s so-called “fiscal rule.” Progress in this area looks to be on track for 2018, with higher oil prices helping to ease some of the worry about the deficit meeting the mandated level of 3.1% of GDP. But over the longer term, the macroeconomic fundamentals mean that reaching the lower rates in years to come will be difficult.

“Fitch anticipates that the adjustment of the current account deficit will continue significantly in the coming years due to better export dynamics,” stated Bancolombia, the country’s largest bank, in a note to investors after Fitch affirmed its rating. “Against this, we believe that the correction could be lower due to a rebound in imports in line with the recovery of domestic demand.”

Bancolombia is in agreement with Fitch that Colombia will hit the 2018 target of having a fiscal deficit of 3.1% of GDP. But the Medellín-based bank contrasted the agency’s rationale for 2019 figures with its own (somewhat) more optimistic expectation.

“The agency believes it will be difficult to reach the target of a total deficit of 2.4% of GDP in 2019 in the absence of the implementation of further measures,” stated Bancolombia. “This is explained by increasing pressures on spending in a post-conflict scenario and strengthening of infrastructure. In this regard, we believe the target could be met in 2019, although this would be largely linked to the current dynamics of oil prices.”

Richard Francis of Fitch Ratings, speaking about Colombia today at a Council of the Americas event in Washington, said that Fitch Ratings has forecasted 2.6% GDP growth for the country in 2018. Though below its earlier projection of 2.8%, this figure is in line with the latest prediction of the Colombian central bank. It is, however, below the more optimistic predictions of closer to 3% made in early 2018 by the International Monetary Fund and World Bank.

But while higher growth for 2018 would help ease fiscal concerns to some degree for the incoming president — who will be decided by an election in May that Fitch expects to go to a runoff in June — the budget will remain troublingly tight for the foreseeable, stated Francis.

He added that the remaining challenges will still likely require ongoing adjustments and tough fiscal decisions going forward if Colombia wants to retain the necessary fundamentals, including concerns about adhering to the fiscal rule, to retain its BBB rating.