The risks that Colombia must avoid to avoid losing its risk rating

This week, good news was released that supports the country’s economic growth, which, although uneven and slow, is maintained and little by little leaves the ghost of the crisis behind. Fitch Ratings reaffirmed the credit rating at BB+ with a stable outlook, discarding the projections that at the time spoke of a possible grade reduction.

The decision of this risk agency was taken by analysts as a boost to the efforts of the Ministry of Finance in favor of fiscal stability. However, they were emphatic that they expect things to improve in the future, since debt levels and the interest rate are above the average for “BB” countries and this could have an impact going forward.

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Daniel Velandia, managing director of Research at Credicorp Capital, highlighted that beyond the note, the positive data was really in the outlook, which remained stable, since it gives the Government time to make the necessary adjustments with a view to guaranteeing fiscal stability and improving the cash situation.

“It is read, somewhat implicitly within the statement, that although there are important risks regarding the fiscal accounts in the future, the institutions in Colombia are very strong and there is a lot of uncertainty about the future of the reforms that are currently going through the Congress or that plan to be presented by the government in the coming months and during 2025,” he explained.

Velandia said that “to the extent that in recent months there has been a lot of noise around fiscal challenges, which has had an obvious impact on risk assets, especially the dollar, the fact that Fitch reaffirmed the rating and leave the room stable above all, That detail in particular is important. “In some ways it provides some peace of mind to the markets.”

How can you lose the note?

Without a doubt, what Fitch said is important and gives respite to the economy, which has been fighting for months against the slowdown, but we must not overlook the three factors that could lower the rating. Latent risks that require additional effort on the part of the monetary and fiscal authorities.

Firstly, with regard to public finances, Fitch highlighted that “a sustained deterioration in the debt/GDP ratio due to persistent fiscal deficits or weak growth” could affect the perception of risk and, therefore, the grade in an upcoming review. Likewise, they were emphatic that one cannot live at the limit of the fiscal rule.

On the other hand, touching on a point that has been talked about a lot in recent months, the report says that the risk rating may also be revised downwards if a “deterioration in investment and medium-term growth prospects with social implications persists.” adverse”.

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“An upgrade in the rating would be conditional on fiscal consolidation that reduces the debt-to-GDP ratio, along with sustained growth above historical averages, supported by macroeconomic stability. Furthermore, advances in governance and social cohesion would strengthen the country’s economic position, providing a framework more robust to face its structural and financial challenges,” concluded Fitch Ratings.

The third element that would work against the credit rating is the risk of “an increase in external vulnerabilities, such as greater current account deficits or a significant drop in foreign investment, which is why it is necessary to redouble efforts in market expansion.

Fitch Ratings.

Special attention

Through her X account, the president of AmCham ColombiaMaría Claudia Lacouture, pointed out that the document makes important warnings regarding fiscal deficit that should not be overlooked and that although the country came out ahead on this occasion, this is part of the constant monitoring of the rating agencies.

“The recent Fitch Ratings report on the Colombian economy requires full attention. The rating agency warns of risks in public finances due to the growing fiscal deficit, higher public spending and lower tax collection. These alerts aggravate investment uncertainty, as reflected by the US State Department,” said Lacouture.

He added that “to recover the level of investment and attract confidence, the Government must moderate spending, promote productive investment and strengthen public policies that promote formal employment and reactivate economic growth.”