Fitch Ratings has affirmed Colombia's long-term foreign and local
currency Issuer Default Ratings (IDRs) at 'BBB' and 'BBB+',
respectively, with a Stable Outlook. The issue ratings on Colombia's
senior unsecured foreign and local currency bonds are also affirmed at
'BBB' and 'BBB+', respectively. The country ceiling is affirmed at
'BBB+' and the short-term foreign currency IDR at 'F2'.
KEY RATING DRIVERS
Colombia's flexible and credible policy framework, improved external
buffers and favorable macroeconomic performance in relation to 'BBB'
peers balance high commodity dependence, increased external
vulnerability, limited fiscal flexibility and structural constraints in
terms of low GDP per capita and weak governance indicators.
Colombia's track record under its inflation-targeting regime, flexible
exchange rate, and healthy banking system underpin its capacity to
absorb external shocks and maintain macroeconomic and financial
stability. The flexibility of the Colombian peso to absorb the oil shock
and increased international financial volatility has been significant,
reflecting Colombia's favorable starting position in terms of financial
system robustness, limited FX mismatches in the economy and low
inflation. The Colombian peso has depreciated by close to 40% since the
oil price decline began in H214 and 20% since the end of June 2015.
Nevertheless, strong depreciation of the Colombian peso, the impact of
El Nino and a still dynamic domestic demand have pushed inflation above
the inflation target at 3% (plus/minus 1 percentage point) and could
average 4.9% in 2016. The central bank has responded with 100bps in
hikes since September and is likely continue to tighten monetary policy
in order to bring headline inflation and expectations under control and
support the reduction of external imbalances.
Growth prospects have weakened, as Fitch expects the Colombian economy
to expand by 2.8% in 2015, which could slow to 2.6% in 2016, as a
tighter monetary and fiscal stance and lower regional public expenditure
will weigh on the positive impact of the beginning of the execution of
the 4G projects and the full-year impact of the expansion of the
Cartagena refinery. The economy could accelerate in 2017 based on
infrastructure execution and the easing of the present trade shock.
Colombia's external vulnerability is high as the current account deficit
could reach 6.1% of GDP in 2015, thus exposing the country to changes in
investor confidence and external debt build-up, as net FDI inflows will
likely reduce. The current account deficit is expected to average 4.8%
in 2016-2017 due to slower growth, the weaker peso, the full-year
positive contribution of the increased capacity of the Cartagena
refinery, and recovery in non-commodity exports.
International reserves stood at USD46.8 billion at the end of November
2015 (almost seven months of CXP) and the central bank has not sold USD
in the FX market to stem the peso depreciation. Nevertheless, the
authorities have indicated they will intervene in the event of high
volatility through an option-based mechanism. Colombia renewed access to
the International Monetary Fund's Flexible Credit Line (FCL) for USD5.45
billion to further buttress shock absorption capacity and policy
In spite of expenditure adjustments, central government deficits are
likely to increase from 2.4% of GDP in 2014 to 3% and 3.6% in 2015 and
2016, respectively, reflecting a loss equivalent to close to 3pp of GDP
in oil revenues between 2013 and 2016. Although the 2016 nominal fiscal
deficit could be higher under the fiscal rule in the event of lower
growth or weaker oil prices, authorities have stated they will make the
necessary adjustments to contain further fiscal deterioration, thus
committing to the 3.6% of GDP deficit target.
Government debt, 44.7% of GDP in 2015, has increased and could remain
above the 'BBB' median over the forecast period. Nevertheless, deft
liability management has improved currency, refinancing and interest
rate risks. General government debt maturities will average 2.4% of GDP
in 2015-2016, below 5% average for the 'BBB' median.
Fiscal policy flexibility is constrained by a narrow revenue base, a
rigid expenditure profile and limited fiscal savings. Hence, a policy
response is necessary to provide a credible path for deficit reduction
and debt stabilization in the medium term. The government has stated it
plans to introduce a revenue-positive tax reform in first-half 2016 in
order to improve the efficiency and broaden the base of the current tax
Colombia could reach a peace agreement in 2016 through the conclusion of
negotiations with the FARC and a plebiscite process. The implementation
of a peace agreement could provide a confidence boost in the short term
and medium- to long-term benefits (i.e. with investment in energy and
agriculture) that could increase growth prospects. In the near term and,
given the wider fiscal deficit, such an agreement would highlight the
importance for the government to rebuild its revenue base to accommodate
required investment without jeopardizing fiscal consolidation.
The main factors that could, individually or collectively, lead to a
rating action are:
--Insufficient policy response that leads to faster fiscal deterioration
and a rising debt trajectory;
--Continued deterioration of external credit metrics.
--Significant strengthening of Colombia's external and fiscal balance
--A higher growth trajectory that supports debt reduction and reduces
Colombia's income gap with higher-rated sovereigns;
--Improvement in governance indicators reducing the gap with 'BBB' peers.
--Fitch assumes that oil prices average USD55 in 2015, similar to 2016,
and USD65 in 2017.
--Fitch assumes that authorities will undertake fiscal policy measures
to confront the oil shock and lower growth.
--Fitch assumes that the internal conflict in Colombia does not
jeopardize investment and growth.
Additional information is available on www.fitchratings.com
Sovereign Rating Criteria (pub. 12 Aug 2014)
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