What Jumps Out – Standard & Poor Makes Their Move (Colombia Downgraded To Junk)

First and foremost, the decision to downgrade Colombia to ‘junk’ status by S&P was a surprise. We may hear bravado from the government over the next 24 hours but the consensus was that the ratings agencies would let the current political unrest play out a little before making final decisions. Instead one of them has acted.

The term ‘junk’ always appears melodramatic; after all it’s only a few letters (BB+) and Finance Minister Restrepo was quick to state that Colombia would still be able to obtain the external financing it needs. However, the psychological impact is quite clear. S&P, after the tax bill was proposed a few weeks ago, reiterated their BBB- rating but now they have changed their tune…

“The downgrades follow the withdrawal of a fiscal reform introduced to congress in a context of high spending pressures, which has resulted in a significantly lower likelihood of Colombia improving its fiscal position following a recent and marked deterioration.”

The big question is what Fitch (BBB-) & Moody’s (Baa2) chose to now do. Will they wait to see what is contained within ‘Tax Reform II’ when it is resubmitted? The issue is that there is little clarity on when that will be. Congress will shut down for the holidays in just over a month and there has been no progress report on the behind-the-scenes negotiations taking place.

On the bright side, S&P improved their outlook from Negative to Stable as the economy continues to reopen. The government is aiming for near normality in 2H21 and yesterday announced that the frontiers with our neighbors will be opening soon, although some are questioning that in the case of Brazil which is still bedeviled with problems.

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

One doubts that the already emboldened protesters will directly add this to the list of achievements. The government has already offered subsidies on university education and a youth employment program – however indirectly they are making inroads, and they show few signs of stopping. Yesterday the next battleground—the health reform—was voted down in Congress, so that is one less thing to worry about.

That is why it is uber-urgent to get ‘Tax Reform II’ into the public forum. The government needs to show they mean business and are seeking equality. This may calm the situation if well explained, and also prevent the other ratings agencies from taking adverse action. It doesn’t have to be a picture-perfect reform, just one that gets the job done in as least a painful form as possible.

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Ironically yesterday there was a very successful bond auction as Isagen issued a total of $600 billion COP ($160 million USD) in bonds (5-20 years). Overall demand was at $220 million USD and it showed that there is still plenty of demand for Colombian paper.

Unfortunately, that was scheduled to be followed by another bond issuance today by Bancoldex however events have overtaken them and the offer has been postponed:

“The change in the rating of the nation is an event occurring after the publication of the notice of offer, which is beyond the control of Bancóldex and that materially affects the financial conditions under which the placement of the ordinary bonds offered would be carried out”

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This one brief statement by Bancoldex is a precursor of what the markets may be facing over the next 24 hours. The peso may well struggle and the COLCAP is likely to be nervous. Much will depend on Fitch. Moody’s has Colombia 2 notches into Investment Grade however if Fitch decides to take action there will be a lot of concern.

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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

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