Colombia’s Short-Term Debt Ratings Suffer Downgrade, but Outlook Improves to ‘Stable’

Wall Street bond rater Fitch Ratings announced last night (July 1) that it has downgraded Colombia’s “Long-Term Foreign-Currency” (LTFC) and local currency “Issuer Default Ratings (IDR)” to ‘BB+’ from ‘’BBB-,’’ but Colombia’s debt outlook is now revised to “stable,” up from the prior rating of “negative.”

“The [LTFC] 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,” according to Fitch.

“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 bond rater added.

The Covid-19 pandemic caused a 6.8% GDP contraction in 2020, caused the government debt-to-GDP ratio to hit 58.3%, up from 44.7% in 2019. “Fitch now expects government debt to GDP to continue to rise over the forecast period to 64.4% of GDP by 2023,” the analyst added.

While the Covid crisis caused a big jump in unemployment along with contractions in GDP, private-sector income and government tax revenues, “the pace of [Covid-19] 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,” Fitch noted.

Following a failed tax proposal in April that aimed to tax wealthier people and corporations in order shore-up government finances and extend benefits to Colombia’s poorest populations, “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,” the analyst noted.

“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,” the analyst added.

However, “the passage of any reforms will be difficult to achieve given the growing social pressures, the government’s low popularity and the upcoming elections, with congressional and presidential elections scheduled for March 2022 and May 2022 respectively,” Fitch noted.

Combined with further extension of government subsidies to the poor, “Fitch forecasts central government deficits of 8.2% in 2021 and 6.9% of GDP in 2022,” up from lower amounts in the last decade, the analyst added.

If the government succeeds in selling some state assets, then fiscal deficits could be reduced, Fitch added.

In addition, “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,” Fitch noted.

On a positive note, “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,” the company added.

Inflation expectations likewise look good, Fitch added.

Meanwhile, foreign direct investment (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,” the analyst found.

On another positive front, “Colombia’s external liquidity has improved markedly over the last three years as a result of the central bank’s international reserve accumulation policy,” according to Fitch.

“International reserves rose to US$58.5 billion at year-end 2020, up significantly from US$52.7 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 International Monetary Fund for US$12.2 billion (out of a total program of US$17.6 billion),” the analyst concluded.