Fitch Ratings Analyst: Tax Reform May Not Be Enough to Improve Colombia’s Ratings Outlook

This article is a contribution to Finance Colombia from Rodrigo Torres, a Colombian journalist living in New York.

An analyst at Fitch Ratings believes that the major tax reform passed by Colombia in December may not be enough to warrant an upgrade of the country’s ratings outlook from negative to stable.

Currently rated BBB by the New York-based ratings agency, the country is suffering more economic uncertainty than it has in years. Both Fitch and Standard and Poor’s put it on negative watch last year, and officials in Bogotá, including Colombian Finance Minister Mauricio Cárdenas, saw the tax overhaul as necessary to preserving its current rating. “We’re going to introduce all the decisions that are necessary to keep our BBB rating,” the minister told Bloomberg last year.

Richard Francis, an analyst who spoke with Finance Colombia in New York following a meeting with Cárdenas, said that the reform was indeed important for the country to cool its debt concerns and guarantee the fiscal front in the medium term. But he believes that it remains too early for the agency to make any changes until it becomes clear whether the value-added tax increase from 16% to 19%, among other revenue-generating changes, will be enough to replace the vast sums that the federal government has lost since the price of oil plummeted in the second half of 2014.

“We have to wait for the results of the tax reform,” said Francis in New York. “We cannot change the ratings in the short term only because of the approval of that reform last year.”

He says that Fitch will likely make a rating outlook decision in the next two or three months.

Francis also told Finance Colombia that the agency is interested to see if Colombia’s public debt levels start to fall given that the country’s average is higher than its peers in the BBB notch of ratings. Fitch Ratings is also going to evaluate Colombia’s full macroeconomic projections for 2017 and 2018 before determining if it believes the new incoming tax reform will outweigh the potential of more external shocks.

Others have also said that the tax reform may have been too little, too late. Sergio Clavijo, head of the Bogotá-based economic think tank ANIF, told Finance Colombia last year that this overhaul should have come years ago and he advised officials to make a move as far back as 2012.

“It’s going to be very hard actually to avoid at least the reduction of one of the two notches that holds us above the investment grade,” Clavijo told Finance Colombia in October. “Very likely, I reckon that, in a year time, once markets realize that the expected additional tax revenue is coming too late and too little, one notch will be gone.”

Francis does think the reform was a step in the right direction, highlighting that the government is aiming for its current account deficit to be near 5%. That number jumped to 5.2% in 2015 and rose again to 6.5% in 2015 after remaining at 3.1% or lower every year since the late 1990s.

With inflation now falling, something Fitch Ratings expects to continue into 2017, he is also in agreement in terms of monetary policy with Cárdenas, who said yesterday that he will advise Colombia’s central bank to make another cut to the benchmark interest rate at its January meeting. The nation’s Banco de la República lowered the interest rate in December, from 7.75% to 7.5%, for the first time since early 2013.

“The central bank will have to wait and see for the impact of the tax reform in the inflation,” said Francis. “But after that, in the next months they could continue the rate cuts.”

Fitch Ratings is expecting Colombia’s GDP to grow 2.8% in 2017 and then to accelerate to 3% in 2018. Francis said he expects 2017 inflation to average 5.2%, above the central bank’s target rate of between 2% to 4%.

The analyst added that oil prices remaining above $50 USD will help Colombia to reduce the external deficit and that the new government in the United States, led by President-elect Donald Trump, will generate volatility in the markets and the currencies, especially because of a stronger dollar in the recent months.