Moody’s warns that fiscal risks would impact Colombia’s credit profile

In the midst of the various alerts that are being launched in the country due to the fiscal crisis that the Ministry of Finance itself has already recognized, while announcing a spending cut plan to address it, this Wednesday, June 12 A report from the Moody’s agency was released, which warns that all these effects will leave consequences.

During a conversation with the media, this risk rating agency indicated that it currently evaluates Colombia in the Baa2 category with a stable outlook, leaving it at the same level as nations such as Mexico, Hungary, the Philippines or Indonesia. but below regional peers such as Peru, Uruguay or Spain, the latter in Europe.

Although this rating does not represent major variations for the country, as far as this rating is concerned for now, Moody’s made it clear that there are risks that could lead to a change in this outlook due to the macroeconomic deterioration that is being seen in recent months and He said that urgent measures must be adopted.

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In this sense, Renzo Merino, vice president and senior analyst at Moody’s Ratings, He stated that we should not overlook the fact that at this moment Colombia faces a challenging scenario and all the decisions made will be fundamental to know if at the end of the storm, the economy stays afloat or succumbs to the pressures, which would seriously affect The qualifications.

“What we want to analyze is whether this deterioration trend is going to reverse or stabilize after 2024 or if we could see greater deteriorations in the coming years. That is the focus of our analysis,” Merino said.

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However, for this Moody’s analyst it must be made clear that “we have noted the commitment of the authorities to comply with the parameters of the fiscal rule and we understand that there would be adjustments to the extent possible to ensure compliance with this”, situation who rated as positive, understanding that this is one of the issues to take care of in the medium and long term.

The risk rating agency also spoke about what it thinks about the spending cut announced by the Ministry of Finance and made it clear that “the type of spending that can be cut is important, especially if it occurs in the context of a spending cut.” investment that can help promote economic activity, but it must also be noted that currently there are resources that have already been assigned and that have not yet been executed.”

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Although for Moody’s the current macroeconomic context is bringing Colombia to an unfavorable scenario that could trigger an adjustment in the credit rating, its team of analysts emphasized that the bad streak can be turned around, if the right decisions are made and the investment engine is stimulated.

Although Renzo Merino added that the agency is concerned about the possibility of further deterioration in the coming years, he highlighted that a first step is to guarantee compliance with the fiscal rule, recognizing the commitment of the Colombian authorities to adhere to these parameters and make necessary adjustments to ensure compliance.

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“We hope that investment dynamics will improve slightly as 2024 progresses. We understand that in 2023 there were interest rate dynamics and also confidence on the part of investors that affected the dynamics, in addition to the fact that investment in 2022 in works public or in residential construction, for example, it was very strong,” he explained.

Thus, in the long term, Moody’s spokesperson stated that “we hope that by 2025 investment dynamics will improve, consumption dynamics will improve in the country, especially taking into account that the interest rate of the monetary policy will probably continue to be reduced in the coming months, and this will help the economy grow.”

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With this on the radar, the risk agency projects economic growth of 1.3% for Colombia in 2024, anticipating a slight improvement in investment and consumption dynamics. By 2025, the growth rate is expected to approach 2.5% or 3%, driven by lower interest rates and increased investor confidence, and in 2026, an election year, Growth is expected to stabilize around 3%, reflecting the country’s trend growth.

In this sense, Merino emphasized that any significant deviation from the parameters established by the fiscal rule could exert significant negative pressure on Colombia’s credit profile, reiterating that the sustainability and strength of GDP growth will largely depend on responsible action.

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“Colombia has already carried out two tax reforms in recent years that did “They have helped to increase the structural and tax revenues of the Government in a more permanent manner, although obviously these revenues will be subject to growth dynamics,” he stated.

Finally, regarding the need or possibility of a new tax reform to generate the necessary income, Moody’s indicated that “we would not expect there to be a reform as extensive as those carried out in 2021 and 2022. Having said that, we do believe that there are issues on the spending side that have put pressure on fiscal accounts in recent years.”

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Thus, this rating agency joins the voices of those who maintain that beyond seeking resources or sources of income, the way out of the cash crisis facing the Government could initially be in a spending cut, as is currently the case. doing from the Ministry of Finance, although they ask to be careful with the resources of investment, which they consider important to overcome the slowdown.