Colombia’s June 21 presidential runoff will have a significant bearing on the country’s economic policies and prospects, Fitch Ratings said in a commentary published this week.

In the first round of voting on May 31, right-wing candidate Abelardo de la Espriella — running under the Defensores de la Patria movement — received 43.7% of votes, defeating leftist senator Iván Cepeda of the governing Pacto Histórico, who received 40.9%. Neither candidate reached the absolute majority required to win outright, sending the election to a runoff.

De la Espriella’s stronger-than-expected first-round performance prompted a positive reaction in financial markets, reflecting expectations that he may be better positioned to address Colombia’s macroeconomic challenges that have intensified under outgoing President Gustavo Petro.

The next president will face the challenge of addressing Colombia’s wide fiscal imbalance. The central government deficit reached 6.4% of GDP in 2025, or 7.8% when net of a temporary reduction in interest costs from liability management operations. Fitch estimates that debt stabilization will require a fiscal adjustment equivalent to 4% of GDP. Higher global oil prices are expected to boost revenues via taxes and dividends in 2027, but Fitch cautioned that this support may not last.

“De la Espriella’s stronger-than-expected first-round performance prompted a positive reaction in financial markets, reflecting expectations that he may be better positioned to address Colombia’s macroeconomic challenges.” — Fitch Ratings

De la Espriella has pledged fiscal consolidation through a 40% reduction in the size of the state, while Cepeda has proposed restraining public-sector salaries and benefits. Budget rigidities and spending pressures tied to pensions, healthcare, and subnational transfers will make either adjustment difficult. Both candidates have also proposed higher spending — on defense and social welfare respectively. Capital spending could be trimmed as an adjustment variable, but only to a limited extent, with 2025 outlays of 2.7% of GDP.

The interest bill will be another source of pressure amid a higher local yield curve. Recent liability management operations have replaced lower-coupon bonds with higher-coupon ones, providing an up-front financial benefit while increasing future interest costs.

Given these spending constraints, durable fiscal consolidation is likely to require revenue-side measures. Colombia has a history of tax reforms, but new legislation is far from assured. De la Espriella has pledged to cut taxes, and while Cepeda supports revenue-raising measures, he could face obstacles in advancing reforms through Congress — as Petro’s administration found.

Uncertainties about Colombia’s trend growth persist. The economy expanded at an annual rate of 2.5% in 2019–2025, below the ‘BB’ median and below its own prior average of 3.5%–4%, supported by government transfers, a strong labor market, and minimum wage increases that kept private consumption buoyant at +4.2%. In contrast, investment contracted by an average of 1.6% annually, falling to 16% of GDP from 21%, affected in part by business concerns about the Petro administration’s more interventionist policy stance.

De la Espriella has pledged to boost growth through promotion of hydrocarbon development — including fracking — alongside tax cuts and steps to reduce administrative burdens on businesses. Cepeda has pledged continuity with Petro’s state-led development model, without concrete proposals to revive private investment.

Both agendas face implementation challenges. The next legislature will remain fragmented, requiring negotiation to pass any major legislation. As a political newcomer, de la Espriella could encounter difficulty advancing his program should he win. Social protests are a risk, particularly regarding his plans to cut spending and adopt a tougher security stance.

The election could also influence monetary policy, with implications for financial conditions and thus for public finances and growth. Despite rising inflation, the Banco de la República (Banrep) voted to hold its policy rate at 11.25% after swift prior increases of 200 basis points, amid explicit pressure from the executive branch for looser policy. The elections could influence Banrep’s next steps starting with its June 30 board meeting, and will also determine who fills two vacancies on its seven-member board in 2029.

Fitch’s downgrade of Colombia to ‘BB’/Stable in December 2025 reflected the agency’s view that the starting point for public finances had weakened considerably, and that improvement would take time regardless of the election outcome. Faster-than-expected fiscal adjustment, higher growth, and lower real rates that support debt stabilization could be positive for the rating. A worsening of these variables that steepens the debt trajectory could be negative.

Above image: Fitch Ratings

Two decades of fiscal data show that Colombia’s gross general government debt has moved through four distinct macroeconomic phases, ending the current cycle at a level that is materially higher than its pre-pandemic baseline. Persistent annual fiscal deficits, currency volatility, an emergency spending shock and weaker-than-projected tax revenues have combined to push the ratio of public debt to gross domestic product from the mid-30s percent range in the mid-2000s to a band of roughly 60 to 62 percent at the start of 2026, according to figures published by the Ministerio de Hacienda y Crédito Público and the Banco de la República.

The shift carries direct implications for sovereign bondholders, multinationals operating in Colombia and any investor pricing country risk in the Andean region. All three major rating agencies — S&P Global Ratings, Moody’s Ratings and Fitch Ratings — now place Colombia in speculative-grade, or junk, territory, with consecutive downgrades through 2025 and into early 2026.

“The activation of the escape clause confirms that the deterioration observed in 2024 will not be corrected in 2025.” — Renzo Merino, sovereign analyst, Moody’s Ratings

The commodity cushion: 2006 to 2014

During the global commodity supercycle, Colombia benefited from sustained gross domestic product growth and steady government revenue. Hydrocarbon and mining receipts — channeled through Ecopetrol (NYSE: EC; BVC: ECOPETROL) and the broader extractive sector — supplied a substantial share of national tax intake. The debt-to-GDP ratio remained relatively stable during this period, generally hovering between 34 and 38 percent. Even with chronic primary deficits, nominal growth in the denominator absorbed new borrowing, masking the underlying structural imbalance that the Comité Autónomo de la Regla Fiscal (CARF) would later flag as the persistent driver of fiscal stress.

The currency and revenue shock: 2014 to 2019

The mechanics of the ratio changed sharply when Brent crude prices collapsed in late 2014. Reduced hydrocarbon royalties widened the fiscal gap just as the Colombian peso depreciated against the US dollar. Because a significant share of Colombia’s sovereign liabilities is denominated in foreign currency, the peso’s slide automatically inflated the local-currency value of outstanding external debt when measured against domestic GDP. The combined effect — wider deficits funded by new borrowing, plus a valuation effect on existing dollar-denominated obligations — pushed the ratio steadily higher through the late 2010s.

The structural revenue weakness that surfaced during this period has remained a recurring theme in subsequent fiscal assessments from Fedesarrollo and the Pontificia Universidad Javeriana Observatorio Fiscal, both of which have noted that successive tax reforms failed to fully close the gap between commitments and ordinary income.

The pandemic ceiling: 2020

The combination of emergency social spending under the Ingreso Solidario program, expanded health outlays and a sharp contraction in nominal GDP drove the ratio to a historic peak above 65 percent in 2020. The Ministerio de Hacienda reports the all-time high at 65.3 percent of GDP that year. The government activated the escape clause of the regla fiscal — Colombia’s fiscal rule, codified in Law 1473 of 2011 and modified by Law 2155 of 2021 — to accommodate the spending response, suspending the rule for 2020 and 2021.

That episode also triggered the first sovereign downgrade cycle: S&P Global Ratings cut Colombia’s long-term foreign currency rating to BB+ from BBB- in May 2021 after the administration of then-president Iván Duque withdrew a tax reform bill following street protests, costing the country its investment-grade status with that agency.

The new baseline: 2023 to 2026

Strong post-pandemic nominal growth briefly pulled the debt ratio down toward 57 percent in 2023. The decline did not hold. Structural spending pressures, elevated international interest rates and tax collections below budgeted projections pushed the ratio back up, establishing a new operating band around 60 to 62 percent of GDP. The Ministerio de Hacienda reported government debt to GDP at 61.3 percent for 2024.

The administration of President Gustavo Petro and Finance Minister Germán Ávila Plazas activated the regla fiscal escape clause for a second time in June 2025, with the Consejo Superior de Política Fiscal (Confis) approving a three-year suspension covering 2025 through 2027. The decision came despite an unfavorable technical opinion from the Comité Autónomo de la Regla Fiscal, which concluded that legal conditions for activating the clause were not met outside of a national emergency. The clause had previously been invoked only during the COVID-19 pandemic.

According to the Marco Fiscal de Mediano Plazo (MFMP) presented by the Ministerio de Hacienda, net public debt to GDP is projected to rise from 53 percent in 2023 to 61.3 percent in 2025 and approximately 63 percent in 2026. The fiscal deficit for 2025 was initially projected at 7.1 percent of GDP and later revised to roughly 6.2 percent of GDP, with the administration targeting a deficit below 6 percent of GDP for 2026.

Debt service consumes a larger share of the budget

The cost of servicing this debt has reshaped the structure of the national budget. The 2026 draft budget presented by Minister Ávila totals $557 trillion COP, equivalent to roughly $134.7 billion USD, and represents 28.9 percent of GDP. Of that, debt servicing costs are projected at $102.5 trillion COP, or 5.3 percent of GDP, down from 6.2 percent of GDP in 2025.

The figures published by the Ministerio de Hacienda for domestic debt service in 2026 are higher when measured against tax intake alone: of an estimated $130 trillion COP in domestic debt service, $79 trillion COP corresponds to principal that can be rolled over through new issuances, while $51 trillion COP represents interest payments funded directly from the budget. Against projected tax revenue of approximately $300 trillion COP, that implies roughly one in every three pesos collected by the central government is allocated to interest on existing debt.

Rating agencies reprice the sovereign

The rating cycle has accelerated alongside the fiscal trajectory. Moody’s Ratings downgraded Colombia to Baa3 and subsequently into junk territory in 2025, citing the suspension of the fiscal rule. S&P Global Ratings issued a further downgrade in April 2026, its second cut in less than a year, on the same persistent deficit and debt concerns. Fitch Ratings also moved Colombia deeper into speculative grade in December 2025.

The Banco de la República reported external debt — combining public and private liabilities — at $238.7 billion USD at the close of November 2025, equivalent to 54.8 percent of GDP, an increase of $15.8 billion USD from January of the same year. The Colombian economy is currently valued at approximately $435 billion USD.

What investors are watching next

The Comité Autónomo de la Regla Fiscal has stated in its most recent reports to Congress that the 2025 primary balance target was missed by a wide margin even after the escape clause was activated, and that incoming projections for 2026 raise the bar for any return to the original fiscal rule by 2028. Business groups including Fenalco and the Consejo Gremial Nacional have publicly opposed the suspension and signaled potential legal challenges.

The 2026 financing plan disclosed by the Ministerio de Hacienda includes approximately $4.6 billion USD in global bond issuances, primarily to refinance a one-year Swiss-franc Total Return Swap operation valued at roughly $9.3 billion USD. The ministry has stated that the issuance does not constitute net new external debt. Updated debt and deficit targets are scheduled for release in the next iteration of the Plan Financiero.

For executives operating in Colombia or evaluating new investment, the baseline shift from a mid-30s to a low-60s debt-to-GDP environment alters several variables simultaneously: peso volatility tied to refinancing cycles, the trajectory of corporate tax policy as Congress weighs successive reform proposals, and the path of domestic interest rates set by the Banco de la República as it manages inflation alongside elevated sovereign funding costs. Detailed historical and forward-looking debt data is published by the Investor Relations Colombia office of the Ministerio de Hacienda.

Colombia’s General Government Debt-to-GDP Ratio (2006-2026) (image: Google)

On April 8, 2026, S&P Global Ratings (NYSE: SPGI) lowered its long-term foreign currency sovereign credit rating on Colombia to BB- from BB and its long-term local currency rating to BB from BB+. The outlook for both ratings is stable, reflecting expectations that the Government of Colombia will gradually reduce its fiscal deficit while sustaining moderate growth in the national gross domestic product.

The rating action follows persistent fiscal imbalances and a policy environment that has become less predictable since the pandemic-related recession. The government decision to suspend the national fiscal rule in 2025 marked a significant shift in the policy framework. Pro-cyclical fiscal policies have provided marginal support for employment and consumption, but have also contributed to higher inflation expectations and a wider current account deficit. S&P expects the general government fiscal deficit to reach 5.6% of the national gross domestic product in 2026, compared to 5.3% in 2025.

“We expect Colombia to have consistently large fiscal deficits over the next few years.” — S&P Global Ratings

Institutional stability remains a key factor in the rating, though challenges persist. A fragmented legislature followed the March 2026 elections, where Pacto Histórico and Centro Democrático emerged with the largest minorities. The upcoming presidential election, scheduled for May 31, 2026, adds further uncertainty. Candidates such as Iván Cepeda of Pacto Histórico, Paloma Valencia, and Abelardo de la Espriella have proposed varying approaches to fiscal consolidation. The new administration will inherit spending pressures related to domestic security, rising healthcare costs, and pension payments linked to minimum wage increases.

The Banco de la República, the independent central bank of the country, has maintained a tight monetary policy to combat inflationary pressures. Annual inflation reached 5.3% in February 2026, prompting the bank to increase reference rates to 11.25%. S&P anticipates that inflation will not return to the target range of 3% +/- 1% until early 2029. While the independent status of the central bank provides a buffer against external shocks, high interest rates and lower-than-expected revenue collections have contributed to the widening deficit since 2024.

Economic growth is projected at 2.5% for 2026, slightly below the 2.6% recorded in 2025. Per capita growth is estimated at $9,900 USD for 2026, with real growth expected to average just above 2% through 2029. Despite being a net energy exporter, the performance of the US economy and international energy prices continue to influence national outcomes. Hydrocarbon exports declined to 35% of goods exports in 2025, down from 67% in 2013, showing some diversification even as the sector remains a primary source of volatility.

Net general government debt is forecast to approach 66% of the national gross domestic product by 2029, rising from 60.4% in 2025. S&P notes that the government interest burden will average 12.3% of general government revenue over the next three years. The shift toward issuing shorter-term debt instruments has reduced reported interest payments but increased vulnerability to interest rate fluctuations. External indicators remain a concern, with narrow net external debt expected to stabilize at 130% of current account receipts through 2029. Foreign direct investment is expected to be the primary source for funding the current account deficit, which is projected to stabilize around 2.6% of the national gross domestic product.

Vise photo credit © Loren Moss

The downgrade of Ecopetrol’s, OCENSA’s and A.I. Candelaria’s foreign currency (FC) and local currency (LC) Issuer Default Ratings (IDRs) reflects the direct and indirect linkage of these companies to the sovereign rating of Colombia, which Fitch downgraded last week to ‘BB+’ from ‘BBB-‘ with a Stable Outlook.

The downgrade of Isagen and TIGO UNE’s FC IDRs reflects the cap imposed by the country ceiling of Colombia (‘BBB-‘), as these companies do not have substantial assets, offshore credit facilities, or cash held or generated abroad to reduce transfer and convertibility risk. Fitch affirmed their LC IDRs, which remain one notch above Colombia’s country ceiling. The downgrade of ISA’s FC and LC IDRs reflect its linkage with the Republic of Colombia, which owns 51.4% of the company. Fitch considers ISA’s two-notch differential above its parent appropriate.

Statement from Fitch Ratings reprinted as a courtesy to our readers.

Key Rating Drivers

The sovereign downgrade reflects the deterioration of the public finances with large fiscal deficits in 2020-2022, a rising government debt level, and reduced confidence around the capacity of the government to credibly place debt on a downward path in the coming years. Colombia’s gross general government debt (GGGD) to GDP is forecast to reach 60.8% in 2021, more than double the 30% level when Fitch upgraded Colombia back to the ‘BBB’ category in 2011. Fitch expects debt to continue to rise through 2022 and does not expect significant debt reduction over the medium term, leaving Colombia vulnerable to shocks. Fitch sees significant risks to the government’s fiscal consolidation plan, given the reliance on tax administration efforts and divestments, as well as the uncertainty of the impact of the pending tax reform.

Rating Sensitivities

Factors that could, individually or collectively, lead to positive rating action/upgrade:

• Public Finances: Achieving sustained primary fiscal balances consistent with a steadily declining GGGD to GDP ratio that enhances fiscal policy credibility;
• Macro: Higher sustained medium-term economic growth above Colombia’s historical averages of about 3.5%;
• Structural: Steady improvement in governance indicators that leads to improved social cohesion and reform momentum, improving Colombia’s structural fiscal position as well as medium term growth prospects.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

• Public Finances: A failure to achieve fiscal consolidation that leads to a significant deterioration in Colombia’s general government debt to GDP ratio relative to the ‘BB’ peer median;
• Macro: Diminished medium-term growth prospects well below Colombia’s historical potential of 3.5%, leading to continued high unemployment and poverty levels with social ramifications;
• External Finances: Sharp further increase in net external debt to GDP, raising external vulnerabilities.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579 .

The rating actions are linked to the recent downgrade of Colombia’s sovereign and the corresponding Country Ceiling.

ESG CONSIDERATIONS

Ecopetrol has an ESG Relevance Score of ‘4’ for Exposure to Social Impacts due to multiple attacks to its pipelines, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

Ecopetrol has ESG Relevance Score of ‘4’ for Governance Structure, due to its nature as a majority government-owned entity and the inherent governance risk that arise with a dominant state shareholder. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.

Colombia has not defaulted on sovereign debt since before World War 2, though public finances have worsened steadily, due both to the COVID-19 Pandemic and the public’s vehement rejection of President Ivan Duque’s (above) fiscal reform package presented earlier this year. When Duque’s finance minister Alberto Carrasquilla took to national media to sell the fiscal package, he was soundly ridiculed after having no idea how much a dozen eggs (that he sought to tax) cost in Colombia. Carrasquilla had to resign while Colombians took to the streets to reject the tax reform proposal, but also to express broader dissatisfaction with the Duque administration via nationwide protests and major strikes.

“On the issue of eggs, it depends on its quality. Let’s say $1,800 COP (48 cents, US) a dozen or something like that.”

This led to a, by many accounts, disproportionate reaction by Colombia’s ESMAD riot police, which further fed popular outrage, leading to almost daily unrest throughout the country over the past two months. Duque seems to have lost control of the National Police, with them now attacking protesters and noncombatants, all while intensive care units throughout the country are at 100% capacity, some hospitals closing to new patients or treatment.

Colombia now needs to fix its troubled finances more urgently than before, though politically crippled Duque has little political capital to push through a significant tax package, and presidential elections are almost exactly a year away. Duque is now so unpopular, and the social situation has deteriorated so much that his presidential helicopter came under fire as he approached the border city of Cúcuta. With this uncertainty, Fitch issued the downgrade, dropping Colombia out of an investment grade credit rating for the first time in a decade. Fitch’s edited analysis follows:

KEY RATING DRIVERS

The downgrade reflects the deterioration of the public finances with large fiscal deficits in 2020-2022, a rising government debt level, and reduced confidence around the capacity of the government to credibly place debt on a downward path in the coming years. Colombia’s gross general government debt (GGGD) to GDP is forecast to reach 60.8% in 2021, more than double the 30% level when Fitch upgraded Colombia back to the ‘BBB’ category in 2011. Fitch expects debt to continue to rise through 2022 and does not expect significant debt reduction over the medium term, leaving Colombia vulnerable to shocks. Furthermore, Fitch sees significant risks to the government’s fiscal consolidation plan, given the reliance on tax administration efforts and divestments, as well as the uncertainty of the impact of the pending tax reform.

The impact of the Covid-19 pandemic, reflecting the 6.8% GDP contraction in 2020, led to a sharp rise in general government debt to GDP, reaching 58.3% of GDP in 2020 (versus 54.2% for ‘BBB’ median and 59.1% for the ‘BB’ median), up from 44.7% in 2019. Fitch’s debt dynamics forecasts have weakened further since Fitch’s last review. Fitch now expects GGGD to GDP to continue to rise over the forecast period to 64.4% of GDP by 2023. Debt could stabilize around 64% by 2024 but, in Fitch’s view, further fiscal consolidation initiatives beyond those already identified would likely be necessary to begin to reduce the debt level in a meaningful way thereafter.

The passage of any reforms will be difficult to achieve given the growing social pressures, the government’s low popularity and the upcoming elections.

The pandemic has had a significant impact on Colombia’s population and its macroeconomic outcomes. Despite numerous lockdowns, deaths have reached over 100,000 and the country is currently experiencing a severe third wave of infections. The economic impact of the coronavirus and the lockdown responses included a sharp rise in the unemployment rate (to over 20% in May 2020) as well as in rates of poverty. However, the pace of vaccinations is now picking up (with around 23% of the population receiving a least one jab according to Our World in Data) and unemployment has fallen to 15% as some of the hardest hit parts of the economy begin to reopen.

Against this backdrop, the president’s approval rating remains low (27% in late June according to a poll done for Semana magazine), hindering the government’s reform agenda. At end-April 2021, the government introduced a tax reform that included extending the base for personal income taxes and broadening the VAT base in order to begin a fiscal adjustment as well as to extend social programs such as cash transfers to the vulnerable and unemployment benefits. This proposal caused a backlash among the population that resulted in protests and a national strike. As a result, the government withdrew the reform proposal, reflecting insufficient support in the Congress.

Fitch expects the government to reintroduce a revised tax reform package in July 2021 when the new session of Congress commences and is targeting a benefit of around 1.2% of GDP on a net basis. However, Fitch believes that the majority of the fiscal benefit will be obtained only in 2023 (given reliance on corporate income tax measures) while the government extends some pandemic related spending such as cash transfers into 2022. There is a risk that the new tax reform could be watered down. Additionally, the passage of any reforms will be difficult to achieve given the growing social pressures, the government’s low popularity and the upcoming elections (congressional and presidential elections scheduled for March 2022 and May 2022 respectively).

Colombia’s central government deficit widened to 7.8% of GDP in 2020 as a result of the severe economic downturn, which led to a fall in revenues and an increase in government spending, reflecting measures implemented to combat the pandemic and reactivate the economy. The government announced an extension of some pandemic related measures through 2022. As a result, Fitch forecasts central government deficits of 8.2% in 2021 and 6.9% of GDP in 2022 (general government deficits are about 1.0% of GDP lower on average in last decade). Fitch has included government-targeted divestment proceeds in its revenue figures, totaling 1.2% of GDP in 2021 and 0.6% of GDP in 2022, with the latter figure subject to some uncertainty. Without these proceeds, the fiscal deficits would even be higher.

The government outlined a fiscal consolidation strategy in its Medium-Term Fiscal Framework published in mid-June 2021 that would unwind pandemic related spending and increase revenues through an increase in taxes and tax administration. The fiscal adjustment targets a five-year transition period to reach a deficit of around 2.5% of GDP (versus previous projection of 1% of GDP). The government has outlined an updated fiscal rule to be presented with its new tax reform proposal that will include a debt anchor of 55% of GDP with a limit of around 70% of GDP.

Near-term growth prospects have brightened given the reopening of the economy as well as the significant monetary and fiscal stimulus measures implemented by the government. Fitch has raised its GDP growth forecast to 6.3% in 2021, up from Fitch’s previous forecast of 4.9%. Fitch sees some upside to even the revised forecast if the coronavirus pandemic outlook improves and social protests remain subdued, albeit there is a greater than usual degree of uncertainty surrounding forecasts.

Colombia’s gross general government debt (GGGD) to GDP is forecast to reach 60.8% in 2021, more than double the 30% level when Fitch upgraded Colombia back to the ‘BBB’ category in 2011.

Fitch expects growth of 3.8% in 2022, somewhat above potential. While Fitch believes that there has likely been some permanent economic scarring from the pandemic, the large influx of Venezuelan immigrants will likely provide a boost to medium-term growth prospects. Currently favorable terms of trade should also provide tailwinds to growth prospects.

Inflation and inflation expectations have been contained, with inflation at the lower end of the target. The central bank cut rates by 250 basis points to 1.75% between February 2020 and September 2020. Expectations are for the central bank to begin to tighten by 4Q21 as the output gap closes.

The current account deficit narrowed significantly in 2020 due to import contraction and reduced outbound profit remittances as well as an increase in inbound remittances. Fitch expects the deficit to widen to 4.4% of GDP in 2021 as a result of higher imports as the economy recovers. FDI historically has covered around 70% of the current account deficit (CAD) and Fitch expects the favorable financing of the CAD to continue during the forecast period.

Net external debt to GDP has risen over the last decade and is expected to continue to rise over the forecast period to 21.5% of GDP by 2023 from 16.4% in 2020 due partly to sovereign external borrowing to finance large deficits. Colombia’s external liquidity has improved markedly over the last three years as a result of the central bank’s international reserve accumulation policy. International reserves rose to USD58.5 billion at year-end 2020, up significantly from USD52.7 billion in 2019. As a result, Fitch’s external liquidity ratio rose to 108% in 2021 from 89% in 2019. Additionally, Colombia maintains access to a flexible credit line with the IMF for USD12.2 billion (out of a total program of USD17.6 billion).

RATING SENSITIVITIES

FACTORS THAT COULD, INDIVIDUALLY OR COLLECTIVELY, LEAD TO NEGATIVE RATING ACTION/DOWNGRADE:

• Public Finances: A failure to achieve fiscal consolidation that leads to a significant deterioration in Colombia’s general government debt to GDP ratio relative to the ‘BB’ peer median;
• Macro: Diminished medium-term growth prospects well below Colombia’s historical potential of 3.5%, leading to continued high unemployment and poverty levels with social ramifications;
• External Finances: Sharp further increase in net external debt to GDP, raising external vulnerabilities.

FACTORS THAT COULD, INDIVIDUALLY OR COLLECTIVELY, LEAD TO POSITIVE RATING ACTION/UPGRADE:

• Public Finances: Achieving sustained primary fiscal balances consistent with a steadily declining GGGD to GDP ratio that enhances fiscal policy credibility;
• Macro: Higher sustained medium-term economic growth above Colombia’s historical averages of about 3.5%;
• Structural: Steady improvement in governance indicators that leads to improved social cohesion and reform momentum, improving Colombia’s structural fiscal position as well as medium term growth prospects.

SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)

Fitch’s proprietary SRM assigns Colombia a score equivalent to a rating of ‘BB+’ on the LT FC IDR scale.

Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:

• Macroeconomic: +1 notch added to compensate for the disproportionate negative impact of the GDP volatility variable on the SRM score driven by the impact of the pandemic shock, which we believe will be temporary, and would otherwise add excess volatility to the rating. Colombia has a long track record of stable positive growth with only one year of negative growth in the last 30 years.
• Fiscal: Fitch has introduced a -1 notch to reflect Colombia’s rigid spending profile and limited ability to achieve a structural fiscal consolidation consistent with debt reduction over the medium-term. This is evidenced by reliance on one-off divestments and the increasing political impediments to reducing spending or passing comprehensive structural tax reform measures, as well as a high degree of uncertainty about the impact on revenues from improved tax administration both in terms of size and timing.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

KEY ASSUMPTIONS

Fitch’s oil price assumptions for 2021 are USD63/barrel and USD55/barrel for 2022.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Colombia has an ESG Relevance Score of ‘5’ for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Colombia has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.

Colombia has an ESG Relevance Score of ‘5[+]’ for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Colombia has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.

Colombia has an ESG Relevance Score of ”4[+] for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Colombia has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

Colombia has an ESG Relevance Score of ‘4[+]’ for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Colombia, as for all sovereigns. As Colombia has track record of 20+ years without a restructuring of public debt and captured in Fitch’s SRM variable, this has a positive impact on the credit profile.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.

Cover Image by vkingxl from Pixabay

Fitch now expects real GDP in Chile to contract by 3.9% in 2020 compared with their previous forecast of negative 1.9%. For Colombia, the ratings firm forecasts a contraction of 4.5%, compared with negative 2% previously. Both revisions reflect the extension of domestic lockdown measures with a large impact on consumption and investment as well as the coronavirus pandemic’s broader effects on lower commodity prices, higher funding costs and capital outflows for emerging markets overall. In Colombia, the likely fall in oil production will also hit growth.

Deep recessions are magnifying fiscal deterioration. Fitch forecasts Chile’s 2020 deficit to widen to nearly 10% of GDP and Colombia’s central government deficit to rise to 7% compared with their previous forecasts of 9.3% and 5.5%, respectively. Chile’s debt-to-GDP will rise to 36% and Colombia’s to 55%, up more than 8 pp and 10 pp, respectively, from 2019.

As with other sovereigns, Fitch’s forecasts are subject to higher than normal uncertainty around the pandemic’s duration and intensity, creating further downside risks to growth. Both countries’ governments look to stimulate economic activity. Chile has announced an additional fiscal package to provide cash transfers to the most vulnerable, while the Colombian government recently announced further support measures including wage subsidies for some companies and deferring income tax payments until December, as well as increasing fiscal stimulus spending to 2.4% of GDP from 1.4%. Both countries’ central banks have lowered policy rates and provided liquidity to credit markets through bond-buying programs among other measures.

Lack of fiscal consolidation that allows government debt to continue rising is a negative rating sensitivity for both sovereigns (for Chile, the erosion of fiscal buffers provided by sizable sovereign assets is also a sensitivity). Deficits were under pressured heading into the crisis, partly due to Chile’s increased social spending and Colombia’s expected fall in tax revenues. Colombia’s finance minister has mentioned possible tax reform next year, and Chile passed tax reform in early 2020 to fund new social spending and created commissions to provide proposals to reduce tax exemptions and rationalize spending. However, continuing deterioration in near-term economic and fiscal prospects increases the importance of formulating credible medium-term plans, including fiscal reforms on the revenue or expenditure side, to sustainably restore growth and stabilize debt.

Chile’s debt ratio would remain lower than the ‘A’ rating category median in 2020 under Fitch’s revised forecasts, but social pressures may test the authorities’ resolve to maintain planned structural fiscal consolidation. Although the ratings firm expect a significant bounce in growth in 2021 as both countries’ domestic and external demand revives, failure to address the risk of lasting economic damage stemming from the current crisis would intensify pressure on the rating. The possibility of a longer-term hit was highlighted by Chile’s Experts Advisory Council, which recently reduced its annual trend growth forecasts by nearly 1pp through 2024. Weaker growth prospects would adversely affect debt dynamics and could exacerbate social tensions, in Fitch’s view.

Colombia faces challenges raising tax revenues over the medium term, especially given the expected loss of oil-related revenues worth over 1% of GDP in 2021 and reduced tax revenues due to the 2019 Economic Growth Law. Both countries face social and political pressures to increase pension, healthcare and education spending, highlighted by protests between October and November 2019.

Elections in October 2021 in Chile and May 2022 in Colombia may narrow the window of opportunity for reforms. A referendum on Chile’s constitution scheduled for October 2020 could add to political uncertainty.

Colombia’s Tatacoa Desert image by Makalu from Pixabay

Weakening fiscal dynamics have been a key driving factor in sovereign rating downgrades in the region over the past several years and the current high number of Negative Outlooks (seven of 19 rated sovereigns.)

Fiscal Pressures Have Been a Key Driver of Recent Sovereign Downgrades

General government debt and deficits in a large majority of Latin American countries are larger now than in 2008 prior to the last global recession, following years of tepid growth and a lack of significant recovery in commodity prices. While a global recession is not in Fitch’s base case, global growth slowed in 2019, and Fitch forecasts US, Eurozone and Chinese GDP growth to decline further (albeit at a much slower pace) in 2020. This places Latin America in a vulnerable position, with limited fiscal capacity to support growth in the event of a sharper than expected downturn.

While weak fiscal dynamics are generally shared across most countries, there is a high degree of variation among countries’ current fiscal conditions, consolidation paths and risk profiles in the region. Argentina and Ecuador are among the most vulnerable, with high fiscal deficits and financing challenges. Both countries have entered into IMF programs but the adjustment targets are ambitious and the political sustainability of such consolidation remains in question, particularly after the recent change in government in Argentina and the strong social push-back to subsidy cuts that occurred in Ecuador in late 2019. Argentina has not received any IMF disbursements since August 2019, and there is considerable uncertainty regarding the future of the program.

Bolivia, Brazil and Costa Rica face similar challenges from rising public debt and large deficits, though without IMF-led adjustments. Nonetheless, the home-grown consolidation plans are subject to implementation risks. Brazil’s passage of pension reform in late 2019 was a notable success, though this is a necessary but not sufficient condition for strengthening public finances and stabilizing the rising public debt. Future fiscal reforms embedded in constitutional amendments presented to congress last year may face political resistance that could lead to delays and/or dilution.

Higher rated sovereigns, including Colombia, Panama, and Uruguay, have also experienced fiscal deterioration in recent years and have struggled with meeting pre-set fiscal targets, reducing policy credibility. Frequent revisions to targets were a contributing factor to Rating Outlook revisions to Negative for both Colombia and Uruguay in 2019 and 2018, respectively. Mexico has maintained conservative fiscal targets but underpinned by optimistic underlying assumptions related to economic growth and oil production. Contingent liabilities related to Pemex are another fiscal challenge for Mexico.

Chile, Peru and Paraguay stand out in the region for having relatively stronger starting fiscal positions to respond to a sudden slowdown. However, fiscal deterioration has occurred to varying degrees in these countries as well. Most notably, Chile has significantly revised its fiscal targets (implying higher deficits) to respond to demands resulting from last year’s social unrest and weaker economic activity.

For analysis on fiscal conditions and the outlook for consolidation across Latin America, refer to the Fitch Wire + report: “Limited Fiscal Space Raises LatAm Vulnerability Ahead of Next Global Downturn,” available through the link here.

Image by Jan Mallander from Pixabay

Full details of all winners can be found by clicking here.

Lundin Gold also came out top in the Latin America: Structured Loan Deal of the Year category, winning with their Fruta Del Norte US$350,000,000 Senior Secured Dual Tranche Project Finance Facility due in June 2026. The deal consists of a US$250,000,000 Uncovered Commercial tranche and US$100,000,000 ECA-covered tranche.

Frontera Energy is the winning corporate issuer taking the Andes: Corporate Bond Deal of the Year category for their US$350,000,000 June 2018 Senior Unsecured 5NC3 Bond Offering due in June 2023. Grupo Energia de Bogotá Syndication are also recognized for their Andes: Syndicated Loan Deal of the Year win with their January 2018 US$749,000,000 Syndicated Loan due in January 2023.

The Bonds & Loans Latin America Awards hosted by GFC Media Group recognizes outstanding deals from across the Latin American credit markets in 2017/18. Winners will be awarded at the cocktail reception of the Bonds, Loans & Derivatives Andes conference, on the 25^th April 2019 at the JW Marriott, Bogotá.

Register your place at www.BondsAndLoansAndes.com and enter code FC20 to save 20%.

Finance Colombia is a media Partner of the Bonds & Loans Latin America Awards

EM vulnerabilities are reflected in Fitch’s sovereign rating Outlooks and recent rating actions. Of the 15 sovereign ratings on Negative Outlook, only three are in developed markets. Notable negative EM sovereign rating actions in 2018 included two Outlook revisions for Argentina (B/Negative) and a downgrade of Turkey (BB/Negative).

Global economic growth remains supportive of sovereign credit quality generally, and the sustained recovery in hard commodity prices since 2016 has given a boost to EM exporters. However, a combination of country-specific events and risks, and wider developments – including US rate rises, tighter financial conditions and trade protectionism – have resulted in Fitch reducing its growth forecasts for several EMs during 2018.

Further dollar appreciation and tighter global financial conditions are likely to discourage capital flows to EMs. The rise in foreign-currency EM debt in recent years exacerbates the impact of a rising dollar on the availability and cost of financing for EMs. The direction of the dollar is critical for EMs and is inversely correlated with EM sovereign ratings.

Some external adjustments are under way and policy responses are being mounted, but these are not costless. For example, interest rate rises may help contain pressure on EM currencies, but monetary tightening from a relatively loose starting point is another barrier to growth. And while many EM central banks typically say that they only intervene in currency markets to smooth volatility, data suggests that they may spend reserves to prevent even greater depreciation, depleting external buffers.

External and fiscal balance sheet pressures are most evident in Latin America and the Middle East and Africa (MEA). Fitch’s EM sovereign ratings reflect not only a sovereign’s degree of vulnerability to tighter global financing conditions and shifting capital flows, but also its ability to navigate resulting economic and balance sheet pressures, which vary considerably from sovereign to sovereign.

Fitch Ratings’ new report ‘Emerging-Market Sovereign Pressures to Persist in 2019’ was published today and is available by clicking here.

Above photo: Landslide at a gold mining site in Colombia (Loren Moss)

The Ministry of Housing and Public Credit, Minhacienda, completed a successful bond offering today of $1.5 Billion (US), though there was $5 billion worth of demand from 244 institutional bond buyers from throughout the USA, Europe, Asia, and in Latin America.

Minister Mauricio Cárdenas said regarding the issuance, “Its excellent news that reflects renewed investor confidence in the Colombian economy. Its recognition of the flexibility and capacity to adapt our economic policy in light of the volatility of international commodity prices.”

A year ago, Colombia reached a record low 5.6% interest rate on its long bond offering. This rate of 5% breaks that record. A further testament to the nation’s creditworthiness is the oversubscription of $5 billion exceeding the $4.2 billion oversubscription of a year ago.

 Boletín / Comunicado