The voting pattern mirrored recent deliberations: four board members favored maintaining the rate, two voted for a 50 basis point (bp) reduction, and one member supported a 25 bp cut. This outcome reinforces the widely held expectation that the year-end policy rate will remain at 9.25%, suggesting that no further cuts are anticipated during the remainder of the calendar year.

Inflationary and Fiscal Headwinds

The Central Bank’s cautious stance is primarily driven by persistent upward pressures that continue to challenge inflation convergence toward the established target. Key factors influencing future decisions include the impact of the federally mandated increase in the minimum wage, which fuels cost-push inflation; rising inflation expectations across the market; and elevated levels of fiscal uncertainty.

The data used for this analysis was sourced from the Departamento Administrativo Nacional de Estadística (DANE) and the Central Bank itself, among other contributors, underscoring that annual headline inflation figures remain a critical metric in policy calibration.

IMF Flexible Credit Line Cancellation Raises Fiscal Vulnerability

Coincident with the monetary policy announcement, the Colombian government declared the cancellation of the Flexible Credit Line (FCL) arrangement with the International Monetary Fund (IMF). This action follows the IMF’s most recent Article IV consultation for Colombia, which acknowledged signs of stabilization within the national economy while simultaneously issuing warnings regarding potential fiscal risks.

The FCL, designed to serve as a preventative buffer against severe external shocks and market volatility, had been a crucial element of Colombia’s financial architecture. Its cancellation, although consistent with the perceived stabilization of the economy, carries notable fiscal implications. The removal of this backstop is expected to increase the country’s vulnerability to future episodes of market volatility or sudden capital outflows.

Banco de la Republica, the central bank of Colombia, in Bogotá. Photo credit: Banco de la Republica.

IMF Cites “Considerable” Fiscal Weakening

The decision was formalized following the conclusion of the IMF’s 2025 Article IV consultation on September 29, 2025. The IMF’s Executive Board released a sobering assessment, noting that while economic growth has strengthened and inflation is easing, significant challenges remain.

The core of the IMF’s concern lies in Colombia’s public finances. The report highlights a “widening fiscal deficit and rising debt levels,” which have resulted in higher borrowing costs (elevated sovereign spreads) and weak private investment amid “lingering concerns and uncertainties over the direction of policies”.

A key point of contention is the Colombian government’s decision in June to invoke an escape clause, suspending its fiscal rule through 2027. The IMF board stated that due to “repeated fiscal slippages and the temporary suspension of the fiscal rule—a key policy anchor,” Colombia’s fiscal policy and framework have “deteriorated” and “weakened considerably” since the FCL was requested in 2024. Consequently, the country no longer meets the “very strong” assessment required for continued qualification for the FCL.

The IMF warned that further delays in fiscal consolidation could undermine investor confidence and potentially trigger a “sudden stop in capital inflows”. The organization urged Colombian authorities to implement a credible and decisive consolidation plan to “re-anchor expectations, lower borrowing costs, and improve the overall policy mix”.

Economic Projections and Risks

The IMF projects Colombia’s real GDP will grow by 2.5% in 2025, with inflation gradually easing to around 4.5% by the end of the year. However, it forecasts a challenging fiscal landscape, with the central government deficit reaching 7.1% of GDP in 2025 and gross public debt peaking at 62.3% in 2027.

The report also outlined significant external risks, including tighter global financial conditions, geopolitical tensions, and stricter immigration policies, which could disrupt exports, foreign direct investment, and remittances.

Government Defends Decision, Cites Strong Reserves

Colombia’s central bank, Banco de la República, announced the cancellation of the FCL, which was originally approved in April 2024 for two years and amounted to approximately $8.1 billion.

The bank stated the decision was based on the country’s adequate international liquidity levels, with international reserves reaching $65.5 billion. This position was strengthened by a reserve accumulation program and portfolio returns totaling $6 billion during 2024 and 2025. Central bank governor Leonardo Villar asserted that the country’s credit perception will not be negatively affected, stating that “the level of international reserves is strong enough to have supported the decision” and will not have “relevant financial implications”.

The bank clarified that the cancellation does not impact the payment schedule for a disbursement made in December 2020. As planned, the final payment is due in December 2025.

Critics Warn of Economic Fallout

The move has drawn sharp criticism from political opponents and economists, who view it as a serious blow to Colombia’s financial standing.

Mauricio Cárdenas, former finance minister and a presidential candidate, harshly questioned the decision, describing the FCL as a beneficial “cushion” for the country. He warned that it sends a negative message to international investors, particularly in a context of rising credit costs. “Colombia is paying a 13% interest rate on its financing, when 10 years ago it was 6% or 7%,” Cárdenas stated, adding that these higher costs reduce funds available for social investment.

#Economía| El exministro de Hacienda y candidato presidencial, Mauricio Cárdenas Santamaría, cuestionó con dureza la decisión del Gobierno Petro de renunciar a la Línea de Crédito Flexible con el Fondo Monetario Internacional (FMI).

“Estamos muy mal. En 24 horas, el ministro de… pic.twitter.com/LVsMnscpmw

— Jean-Pierre Serna (@jpserna) October 1, 2025

Economist Adriana Oviedo noted that the exit from the FCL “crystallizes a problem of fiscal credibility in Colombia”. She argued that without this external “shielding,” risk agencies will now focus more intensely on the country’s deficit and rigid government spending. In her view, the government is now “forced to make a non-discretionary adjustment to resume the debt path”.

La salida de la LCF del FMI cristaliza un problema de credibilidad fiscal en Colombia. Sin el "blindaje" externo, el foco de agencias de riesgo se centra en el déficit y la rigidez del gasto.

El Gob. se ve forzado a un ajuste no discrecional para reanudar la senda de la deuda. https://t.co/Q1ugSNuS1W

— Adriana Oviedo (@Adri_OviedoLL) September 30, 2025

Former Vice President Marta Lucía Ramírez characterized the move as “a step into an economic abyss,” claiming it distances Colombia from the stability achieved by previous administrations with the FCL’s support. Similarly, former consul

El informe del FMI advierte: déficit al 6.7%, deuda al 61.3%, y vulnerabilidad de la economia colombiana por la caída de commodities. La FCL legado del anterior gobierno,nos dio seguridad financiera. Petro nos lleva al borde del precipicio. ¡Colombia merece mejor!…

— Marta Lucía Ramírez. (@mluciaramirez) September 30, 2025

Former consul Claudia Bustamante called the decision “irresponsible,” warning that “without the backing of the IMF, Colombia loses international confidence, so there is more risk, more cost and more economic uncertainty”.

IMF Photo/Melissa Lyttle/Facebook.

Fiscal Performance and Projections

In 2024, Colombia’s central government reported a fiscal deficit of 6.7% of its Gross Domestic Product (GDP), surpassing Fitch’s earlier projection of 5.6%. This shortfall was primarily due to revenue declines and the government’s inability to implement offsetting spending reductions. Consequently, the general government debt-to-GDP ratio rose to an estimated 58% from 53% in 2023.

Fitch has adjusted its deficit forecasts for the coming years, now anticipating a central government deficit of 6.2% of GDP in 2025 and 5.8% in 2026, up from previous estimates of 5.1% and 4.7%, respectively. The agency projects that the general government debt-to-GDP ratio will continue to increase, reaching 62% by 2026, diverging from the projected ‘BB’ median of 55.4%.

Government Response

Finance Minister Diego Guevara acknowledged the fiscal challenges but reaffirmed the government’s commitment to maintaining fiscal sustainability and meeting financial obligations. He projected that the deficit would decrease to 5.1% of GDP this year.

Economic Outlook

Fitch expects Colombia’s economic growth to accelerate to 2.7% in 2025 from 1.7% in 2024, driven by resilient consumer spending and a recovery in investment. Inflation is anticipated to continue its downward trend, reaching the upper band of the central bank’s 3% (+/- 1 percentage point) target by the end of 2025, down from 5.2% at the end of 2024. The current account deficit is projected to widen slightly to 2.1% of GDP in 2025 from 1.8% in 2024, remaining well below its 2022 peak of 6.1%.

Structural Reforms

The pension reform enacted last year is expected to have an annual fiscal cost of 0.3% of GDP. Additionally, a constitutional reform will increase central government transfers to local and regional governments from 27.2% to 39.6% of current revenues over 12 years starting in 2027. These measures may further constrain fiscal flexibility.

External Buffers

Colombia’s central bank has bolstered its external liquidity position, with reserves reaching $61.9 billion USD as of the end of 2024. In April 2024, the International Monetary Fund approved a new two-year flexible credit line of $8.1 billion USD for Colombia, providing an additional buffer against external shocks.

Future Considerations

Fitch indicates that a continued deterioration in Colombia’s debt-to-GDP ratio, driven by persistently high fiscal deficits or weak growth, could lead to a downgrade. Conversely, successful fiscal consolidation that stabilizes the debt ratio, along with reforms enhancing fiscal and monetary credibility, could result in a positive outlook revision.

This outlook revision underscores the importance of effective fiscal management and structural reforms in maintaining Colombia’s economic stability.

Photo credit: danielgamboabogota from Pixabay.

Adding to these concerns is the delayed routine review of Colombia’s economic status, known as the Article IV consultation. According to José Ignacio López, President of ANIF, this delay stems from doubts regarding the credibility of the government’s fiscal figures, particularly the 2025 deficit target of 5.1 percent of GDP.

Saturday, Julie Kozack, spokesperson for the IMF, issued a statement saying:

“From April 26, 2025, Colombia’s continued qualification for the IMF’s Flexible Credit Line (FCL) is contingent on the completion of both the ongoing Article IV consultation (see staff statement issued on April 18, 2025) and a subsequent FCL mid-term review. The FCL arrangement was approved on April 26, 2024, for two years with a mid-term review to assess continued qualification.”

The press release clarified that the FCL was approved for two years, until April 26, 2026, “with a midterm review to assess the continuation of qualification.” Since the midpoint of this period has passed and the midterm review has not commenced, Colombia cannot access the FCL resources, despite maintaining the borrowing limit, until these two requirements are met.

“It cannot be used until the government presents a credible fiscal plan. In other words, it was on autopilot, and now the IMF says there is too much fog, and they prefer to land to avoid risks. They will not lend money to a government that squanders,” commented former Minister of Finance, Mauricio Cárdenas.

As approved by the IMF on April 26, 2024, the available amount for Colombia under this new quota is approximately $8.1 billion USD for crisis prevention.

Colombia has had access to this FCL since 2009, usable at any time. The only instance of its use was during the COVID-19 pandemic. In December 2020, Colombia disbursed approximately $5.4 billion USD to meet balance of payments’ needs and address pandemic consequences.

FMI suspende la línea de crédito para emergencias que tenía Colombia desde 2009. Es el peor mensaje para los mercados financieros.

Nos quedamos sin llanta de repuesto justo cuando la economía mundial está llena de incertidumbres. La línea de crédito flexible era el mayor seguro…

— Mauricio Cárdenas S. (@MauricioCard) April 26, 2025

However, these resources are now unavailable due to the IMF’s suspension. This development coincides with the IMF’s recent downward revision of Colombia’s economic growth forecast for 2025, from 2.5 percent to 2.4 percent. According to Luis Fernando Mejía, Executive Director of Fedesarrollo, this decision reflects the severity of Colombia’s fiscal situation, with a 2024 deficit of 6.8 percent of GDP, the third-highest in 120 years.

The fiscal rule was also breached in 2024, and the 2025 deficit target of 5.1 percent of GDP lacks market credibility.

“It is the worst message for financial markets. We are left without a spare tire just when the global economy is full of uncertainties. The Flexible Credit Line was the biggest insurance the Colombian economy had. The IMF is viewing Colombia’s situation very negatively. Difficult times are coming,” said Mauricio Cárdenas.

Former Minister of Finance and Rector of Universidad EIA, José Manuel Restrepo, stated that the IMF’s decision creates a scenario of increased uncertainty, potentially raising the country’s risk premium and public financing costs.

“We saw this in recent Colombian placements, which are between 30 and 50 percent more expensive than the historical financing cost of the National Government,” he said.

This would lead to higher interest payments on public debt, a higher exchange rate, and reduced space for productive and social investment in the national budget.

No es buena noticia para Colombia 🇨🇴!! La línea ha sido siempre un respaldo y confianza en la política macroeconómica. Respaldaría eventualmente al país en una situación coyuntural difícil como sucedió en la pandemia parcialmente, y perderla o supeditarla a otras decisiones,… https://t.co/He3GmD4WyN pic.twitter.com/RvBO6I5Lx4

— José Manuel Restrepo Abondano (@jrestrp) April 26, 2025

“The effect will be clearer on the Colombian peso, because this Flexible Credit Line is understood as a possibility of having contingent international reserves. Probably, this Monday at market opening, we will have a weaker Colombian peso,” predicted José Ignacio López.

While the FCL suspension is concerning, José Ignacio López believes the government has options for resolution, as it is not a definitive decision.

“The government still has limited room to maneuver to send a message of fiscal adjustment that allows closing the Article IV and keeping the Flexible Credit Line open until April 2026. The government must present a credible fiscal plan. The fiscal situation is deteriorating, and protecting that credit line is key in the current situation,” he added.

Luis Fernando Mejía also stated that the IMF’s decision is a further warning for the government, reinforcing the urgent need to cut the 2025 national budget. This cut would need to total 40 trillion pesos to avoid another breach of the fiscal rule and resume the path of deficit and public debt reduction.

The Ministry of Finance has stated that it is analyzing Colombia’s fiscal situation and “advancing in the implementation of economic measures that consider the evolution of domestic and external economic conditions, as well as compliance with the goals included in the National Development Plan.”

Photo credit: IMF/Melissa Lyttle/Facebook.

GM are not alone, with other manufacturers having also reduced working hours — and this has been a long time coming.

Ever since overnight interest rates started to rise, the consumer confidence data from Fedesarrollo has reported a falling propensity for vehicle purchases, and forecourt sales have collapsed. On top of this, rolling back the clock, Venezuela was once an key importer of vehicles from Colombia, and that is no longer the case.

It is too late for GM. But, hopefully, Banco de la República will this week cut those overnight rates — by at least 50 basis points — from the current 12.25% in order to support not just the vehicle sector but also the housing and consumer durable markets, which have been equally hit by inflation and central bank policy.

Anything less than 50 basis points is unthinkable — and might lead to them being chased down the road by a pitchfork waving population. Anything more would be welcome shot in the arm for both local markets and investors, as the committee has been overtly conservative so far in their rate-cutting cycle.

With El Nin̈o now on the way out, they should cut by 75bps — if they’re brave enough.

Speaking of El Niño, the rains have arrived! Nothing biblical, so far, but certainly more than a normalization. Reservoir levels are rising, but remain close to critically low levels. Bogotá remains under water-rationing conditions, but already there are those discussing the arrival of La Niña and, with it, the reverse problems of potential landslides and floods.

In other news: Colombia has received praise from the International Monetary Fund (IMF) as they agreed a new two-year $8.1 billion USD stand by loan. The organization highlighted the country’s institutions and the robust economy while complimenting the government on its efforts to move away from fossil fuels.

Finally, in politics, President Gustavo Petro and his cabinet were locked away in an enclave all weekend as we await pronouncements as to whether there will be any change in direction when it comes to pension, education or even health reform proposals, which may yet reappear in the coming months. However, the initial statement was contrite in nature recognizing that mistakes had been made.

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Many of the headlines will be reserved for Friday when National Administrative Department of Statistics (DANE) reveals the inflation number for March. The expectation is that it will have dropped again. According to the Fedesarrollo survey, it is estimated to come it at 7.34%, down from the current 7.74%. Meanwhile, the same survey is now expecting a 5.51% year-end inflation rate to close 2024.

If the analysts are correct, that will comfortably give Banco de la República room to cut another 50bps (to 11.75%) when they sit down in a few week’s time.

That conversation will no doubt be helped the weather experts appearing to be spot on with their El Niño estimate, which suggested it would break last week. There was certainly lots of rain, but XM is still suggesting people need to be careful with energy (which has been impacted by the drop in hydroelectric reservoirs) given that demand rose 8.31% year-over-year in March. Nonetheless, overall, it looks like Colombia will soon be into a normal weather pattern, having had a narrow escape from the dry period.

Hopefully, the central bank will also have taken note of the national unemployment data for February, which stood at 11.7% versus 11.3% a year ago. That is the first year-over-year increase in a very long time — and that backslide sits firmly at the door of a Banco de la República committee that has stubbornly refused to lower rates.

The International Monetary Fund (IMF), in its latest report, highlighted the authorities work in getting the economy back on track after an unbalanced 2021 and 2022. Some of that is the aforementioned central bank raising overnight rates, albeit too far, but also captures the work on the external deficit.

Colombian President Gustavo Petro may take a lot of flak, but the economy has far from come off the rails since August 2022, despite the new head of state inheriting a number of problems from the administration of former President Iván Duque.

If the IMF and ratings agency are generally happy, perhaps the press should take another look. Of course, there is work to do still. But one step at a time.

Finally, the spat in Antioquia over 4G, etc., and ‘Vaca (Piggy Bank)’ continues.

This is effectively local politicians (and some other entities that should know better) stirring up the press in order to gain a few points ahead of the 2026 elections. The government has already stated the original money will be delivered for the infrastructure projects by the July deadline.

The issue is the overspend, which is considerable, and you can’t just print $100 of millions of dollars — not in Colombia anyway. The budget is tight — and being handled carefully — and the money has to come from somewhere. But doubt it will appear before the ‘Vaca’ is filled, which is currently projected to be in June 2025.

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In its updated mid-year World Economic Outlook (WEO) released today, the IMF estimates the region’s gross domestic product (GDP) to grow by 1.9% in 2023, an increase of 0.3 percentage points from the 1.6% projection in the April edition of the report. The agency’s economists also expect regional GDP to grow by 2.2% in 2024, a figure that has not changed since the last report in April.

The authors noted that the improved regional forecast for 2023 is largely driven by positive news in Brazil and Mexico, which are now projected to grow by 2.1% and 2.6% in 2023, respectively.

“The upward revision for 2023 reflects stronger-than-expected growth in Brazil — marked up by 1.2 percentage points to 2.1 percent since the April WEO — given the surge in agricultural production in the first quarter of 2023, with positive spillovers to activity in services,” stated the report. “It also reflects stronger growth in Mexico, revised upward by 0.8 percentage point to 2.6 percent, with a delayed post-pandemic recovery in services taking hold and spillovers from resilient US demand.”

While Colombia was not included in the IMF’s mid-year reassessment, the organization in April projected the nation’s economy to grow by 1.0% in 2023 and 1.9% in 2024.

These figures represent a notable decline from the torrid 11.0% and 7.5% growth seen in the Andean country in 2021 and 2022, respectively, but those years reflected a major recovery from the COVID downturn while also exceeding the latest projections for both Argentina and Chile.

Today’s positive news is not exclusive to Latin America. The IMF now expects global growth to finish at 3.0% this year and 3.0% in 2024, and it credits a range of factors for the improved outlook, including a resolution of the US debt ceiling standoff, easing of the banking crisis that emerged in March, and an ongoing drop in inflation across the world.

The IMF also expects the United States to avoid the long-discussed possibility of falling into recession this year with a 2023 GDP growth projection of 1.8%. This will moderate to just 1.0% in 2024, however, highlighting the ongoing challenges facing all nations.

Despite the overall upward revision for global expectations, the IMF was quick to note that even the revised world growth figures are below the 2022 rate of 3.5% growth and still represent lackluster performance in a general sense.

“While the forecast for 2023 is modestly higher than predicted in the April 2023 World Economic Outlook, it remains weak by historical standards,” wrote the authors. “The rise in central bank policy rates to fight inflation continues to weigh on economic activity … [and] in most economies, the priority remains achieving sustained disinflation while ensuring financial stability.”

The IMF also listed a host of risks that remain for the global economy, any of which could lead to lower-than-expected growth this year and in the longer term.

“The balance of risks to global growth remains tilted to the downside,” stated the report. “Inflation could remain high and even rise if further shocks occur, including those from an intensification of the war in Ukraine and extreme weather-related events, triggering more restrictive monetary policy. Financial sector turbulence could resume as markets adjust to further policy tightening by central banks. China’s recovery could slow, in part as a result of unresolved real estate problems, with negative cross-border spillovers. Sovereign debt distress could spread to a wider group of economies.”

Finance Minister Ocampo was in Washington this week chatting to the IMF and World Bank, traveling with several other local officials. Topics on the agenda included tax reform which is seen as a weapon to close the current account deficit, expected by Ocampo to close 2022 at 5.6%, as well as sustainability and the intention to slowly green Colombia’s energy production.

Whilst in Washington, the IMF raised Colombia’s 2022 GDP estimate to 7.6% – from 6.3% in July. As per other overseas entities, this is by far the highest amongst the front-line countries.

Ocampo remained in the headlines all week with another speech once again nudging the Central Bank on interest rates – his theory being that a supply driven inflation problem will not be cured by exorbitant rates. The problem is that the local swaps traders are anticipating borrowing rates of 11.5% or even higher.

Rupert’s opinions & analysis as an independent expert contributor are his own and not necessarily those of Finance Colombia or the BVC.

Central Bank Head Villar for his part stated that the weak Peso may force rates higher as inflation continues to be imported – he also became the latest authority figure to rule out capital controls.

Going back to the IMF, this week they also warned Latam countries against lowering rates too quickly before inflation was truly beaten.

At the beginning of the week there was disappointing, if somewhat predictable news on the consumer confidence front. Fedesarrollo reported a September number of -11.5% versus August -2.4% and a consensus estimate of -3.2%. IT’s easy to be smart after the event but given the current economic uncertainty and forthcoming tax reform, it is hardly a shock.

Over the weekend both GEB and EPM signed up to the national pact to lower energy prices and by Wednesday the ministry was reporting that no less than 80 companies in the sector had signed up and that via number or renegotiations of bilateral agreements, end users could expect to save $1.5 billion COP ($330 million USD) in 2023.

Later today we have the real sector data for August – there will be YoY gains still, but at a more modest rhythm.

Please find below the video report from LinkedIn:

https://www.linkedin.com/posts/rupert-stebbings-927b6316a_what-jumps-out-up-washington-way-overall-activity-6986660814699036672-Rc2S?utm_source=share&utm_medium=member_desktop

________________________________________

That is about it for today – remember these are just themes that jump out at me – please refer to your local analyst, economist, salesperson or soothsayer for more details.

My regards to all,

Roops

The outlook change to negative reflects risks that the economic and fiscal effects of the coronavirus shock, which Moody’s identifies as a social risk under its ESG framework, may leave a lasting impact on Colombia’s fiscal strength and its overall credit profile. Following a sharp deterioration in debt metrics in 2020, Moody’s expects that fiscal adjustment will start in earnest in 2022 with results contingent upon a tax reform that will be discussed in 2021. In the absence of material fiscal consolidation, government debt metrics are unlikely to significantly improve over the medium term, resulting in a weaker fiscal profile than that of Baa2-rated peers.

The affirmation of Colombia’s Baa2 rating is supported by the government’s track record of prudent macroeconomic policies that support the economy’s capacity to sustain shocks. Moody’s notes that external vulnerability risks have remained contained despite the external shock experienced in 2020 — which included a decline in oil prices. The current account deficit has narrowed and a large portion of it is still financed by FDI, with the flexible exchange rate acting as an adjustment mechanism and international reserve buffers providing strong coverage. Moody’s also considers that the government’s funding strategy has been effective in minimizing financing risks by diversifying funding sources and limiting increases in borrowing costs.

Colombia’s foreign-currency long-term bond and deposit ceilings remain unchanged at A3 and Baa2, respectively. The foreign-currency short-term bond and deposit ceilings remain Prime-2 (P-2). The local currency long-term bond and deposit ceilings remain A2.

Ratings Rationale

Moody’s expects that the pandemic will lead to a GDP contraction of 7.2% in 2020 and weigh on government revenue. Combined with the additional government spending measures implemented in response to the pandemic’s health and economic fallout, Moody’s forecasts the fiscal deficit will come close to 9% of GDP, contributing to a material 15 percentage point increase in the general government debt-to-GDP ratio to 67%, above the ‘Baa’ median of 61% of GDP. The decrease in government revenue will weigh on debt affordability with the interest-to-revenue ratio rising to 13% in 2020 from 10.8% in 2019 — again higher than the 7.8% ‘Baa’ median. Moody’s expects government finance ratios to continue to deteriorate in 2021 even with GDP growth of about 4.5%-5.0%.

The trajectory for Colombia’s debt metrics will be contingent on how successful government efforts are in delivering a thorough fiscal adjustment program over the coming years. Pre-existing conditions related to a narrow tax base for the central government and a rigid expenditure structure will complicate the fiscal consolidation process. The extent to which a tax reform proves effective in raising revenue on a permanent basis will be a major factor influencing Colombia’s fiscal prospects and its credit outlook. In this respect, although the government has been able to broaden its coalition in congress, rising social pressures in the aftermath of the pandemic and political considerations related to the 2022 elections represent challenges that the authorities will have to manage as they seek to achieve substantive progress on the revenue front and move to address rigidities on the spending side.

Rationale For Ratings Affirmation

Colombia’s Baa2 rating is supported by a track record of macroeconomic policies that support the economy’s capacity to withstand shocks and the adjustment that has followed these episodes. Colombia’s policy response to the 2014-16 terms-of-trade shock contributed to Moody’s view prior to the pandemic that key credit metrics — e.g., debt ratios, economic growth — would improve over time. The quality of macroeconomic policymaking is recognized by the sovereign’s qualification for a Flexible Credit Line (FCL) with the International Monetary Fund (IMF). The FCL was expanded this year to $17 billion and will contribute to the funding of the government’s larger financing needs while still providing supplementary coverage for balance of payments risks. Moody’s notes that this ability and willingness to conduct prudent policymaking will be tested by the magnitude of the pandemic’s economic and fiscal shock.

Moody’s assessment of relatively contained external vulnerability risks also supports Colombia’s credit profile. A floating exchange rate has contributed to the adjustment of the external accounts with foreign direct investment continuing to provide a sizable coverage of the current account deficit. The country has been able to accumulate foreign reserves, which currently amount to about 20% of GDP. Reserves, which provide strong liquidity coverage of upcoming external debt payments, are boosted by Colombia’s access to the IMF’s FCL, which provides an additional $12 billion of liquidity support on top of Colombia’s $55 billion foreign exchange reserves.

Colombia’s liability management practices have minimized financing risks, allowing the government to limit the deterioration in debt affordability metrics. Following an initial spike of cross-border borrowing costs, external market conditions have improved, and Colombia’s funding costs are now lower than at the beginning of the year. Conditions in the domestic market have improved as well. The return of nonresident investors, after outflows were reported in March and April, allowed the government to issue its first 30-year local bond, contributing to improving its domestic debt profile. The government has diversified its funding sources with increased resources coming from multilateral institutions, including a $5 billion drawdown from its FCL at very favorable terms.

Environmental, Social, Governance (ESG) Considerations

Environmental risks for Colombia are related to its exposure to physical climate risk in the form of flooding and extreme precipitation caused by the La Niña weather phenomenon that can affect the agricultural sector. Additionally, given the high share of hydrocarbons in exports, Colombia is exposed to carbon transition risks over the longer term.

Social risks are material for Colombia. Despite progress in poverty reduction achieved over the past two decades, persistently high levels of rural-urban income inequality could be a potential source of social unrest. Colombia faces moderate challenges in the provision and quality of education, housing, health and safety and access to basic services. Additional risks related the implementation of the peace agreement with the FARC and the large influx of Venezuelan migrants into Colombia adds pressure to the government’s fiscal balance because of higher social spending, although in both instances there could be medium term positive effects on the economy by supporting increased investment and productivity. Moody’s also regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

Governance considerations, including issues such as rule of law and control of corruption, inform Moody’s view of Colombia’s moderate institutional framework. The government maintains a strong track record of effective fiscal and monetary policymaking.

• GDP per capita (PPP basis, US$): 15,334 (2019 Actual) (also known as Per Capita Income)
• Real GDP growth (% change): 3.3% (2019 Actual) (also known as GDP Growth)
• Inflation Rate (CPI, % change Dec/Dec): 3.8% (2019 Actual)
• Gov. Financial Balance/GDP: -2.4% (2019 Actual) (also known as Fiscal Balance)
• Current Account Balance/GDP: -4.2% (2019 Actual) (also known as External Balance)
• External debt/GDP: 42.7% (2019 Actual)
• Economic resiliency: baa1
• Default history: No default events (on bonds or loans) have been recorded since 1983.

On 30 November 2020, a rating committee was called to discuss the rating of the Colombia, Government of. The main points raised during the discussion were: The issuer’s fiscal or financial strength, including its debt profile, has materially decreased.

Factors That Could Lead To An Upgrade Or Downgrade Of The Ratings

Given the negative outlook, a rating upgrade is unlikely. The outlook could return to stable if Moody’s were to conclude that the measures the authorities will implement over the coming years will prove effective in delivering a material increase in government revenue while simultaneously addressing expenditure rigidities, elements that over time would lead to sustained fiscal consolidation and declining government debt ratios. Rising government revenue would also help improve debt affordability. Bolstering institutional aspects of Colombia’s fiscal policy framework, in particular elements that allow the fiscal rule to support debt sustainability more effectively, would also be credit positive.

Colombia’s rating could be downgraded if Moody’s were to conclude that fiscal consolidation efforts are unlikely to lead to the stabilization and eventual reduction of government debt ratios, as this would leave Colombia with lower fiscal strength relative to peers. Additional negative pressure would emerge if the country were to become more reliant on external debt inflows to finance the current account deficit, or if increasing external imbalances lead to a weakening of the country’s external liquidity buffers.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology. The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

A new Best’s Market Segment Report, titled, “Market Segment Outlook: Colombia Insurance,” states that economic conditions in the country have improved over the past few years. However, development will be limited by the uncertainty arising from the spread of the COVID-19 pandemic, which has forced the country to impose a mandatory quarantine and travel restrictions. Additionally, Colombia relies on the hydrocarbon and mining sectors, which makes it vulnerable to shifts in global commodity prices and demands.

Since the outbreak, Colombia’s central bank has cut the policy rate by 100 basis points, positioning it below inflation, to mitigate the economic and social effects of the pandemic and boost the country’s economy. The main stock market index (COLCAP) has registered a sharp decline, reversing the growth of the last year.

As of November 2019, Colombia was the sixth-largest insurance market in Latin America, with USD 7.8 billion in premiums and an insurance penetration rate of approximately 2.6%. Despite an economic contraction of 2.4%, as estimated by the International Monetary Fund, AM Best expects Colombia’s insurance market to withstand the challenges of the current situation. Nevertheless, AM Best will continue to monitor the economic, political, and regulatory landscape, and the impact on Colombia’s insurance industry.