New York, December 03, 2020 -- Moody's Investors Service, ("Moody's") has
today changed the outlook on the Government of Colombia to negative from
stable. Concurrently, Moody's has affirmed Colombia's long-term
local and foreign-currency issuer and senior unsecured debt ratings
at Baa2 and foreign-currency shelf senior unsecured ratings at
(P)Baa2. The short-term local and foreign-currency
issuer ratings were also affirmed at Prime-2 (P-2).
The outlook change to negative reflects risks that the economic and fiscal
effects of the coronavirus shock, which Moody's identifies
as a social risk under its ESG framework, may leave a lasting impact
on Colombia's fiscal strength and its overall credit profile.
Following a sharp deterioration in debt metrics in 2020, Moody's
expects that fiscal adjustment will start in earnest in 2022 with results
contingent upon a tax reform that will be discussed in 2021. In
the absence of material fiscal consolidation, government debt metrics
are unlikely to significantly improve over the medium term, resulting
in a weaker fiscal profile than that of Baa2-rated peers.
The affirmation of Colombia's Baa2 rating is supported by the government's
track record of prudent macroeconomic policies that support the economy's
capacity to sustain shocks. Moody's notes that external vulnerability
risks have remained contained despite the external shock experienced in
2020 -- which included a decline in oil prices. The current
account deficit has narrowed and a large portion of it is still financed
by FDI, with the flexible exchange rate acting as an adjustment
mechanism and international reserve buffers providing strong coverage.
Moody's also considers that the government's funding strategy
has been effective in minimizing financing risks by diversifying funding
sources and limiting increases in borrowing costs.
Colombia's foreign-currency long-term bond and deposit ceilings
remain unchanged at A3 and Baa2, respectively. The foreign-currency
short-term bond and deposit ceilings remain Prime-2 (P-2).
The local currency long-term bond and deposit ceilings remain A2.
RATINGS RATIONALE
RATIONALE FOR CHANGING THE OUTLOOK TO NEGATIVE FROM STABLE
Moody's expects that the pandemic will lead to a GDP contraction
of 7.2% in 2020 and weigh on government revenue.
Combined with the additional government spending measures implemented
in response to the pandemic's health and economic fallout,
Moody's forecasts the fiscal deficit will come close to 9%
of GDP, contributing to a material 15 percentage point increase
in the general government debt-to-GDP ratio to 67%,
above the 'Baa' median of 61% of GDP. The decrease
in government revenue will weigh on debt affordability with the interest-to-revenue
ratio rising to 13% in 2020 from 10.8% in 2019 --
again higher than the 7.8% 'Baa' median.
Moody's expects government finance ratios to continue to deteriorate
in 2021 even with GDP growth of about 4.5%-5.0%.
The trajectory for Colombia's debt metrics will be contingent on
how successful government efforts are in delivering a thorough fiscal
adjustment program over the coming years. Preexisting conditions
related to a narrow tax base for the central government and a rigid expenditure
structure will complicate the fiscal consolidation process. The
extent to which a tax reform proves effective in raising revenue on a
permanent basis will be a major factor influencing Colombia's fiscal
prospects and its credit outlook. In this respect, although
the government has been able to broaden its coalition in congress,
rising social pressures in the aftermath of the pandemic and political
considerations related to the 2022 elections represent challenges that
the authorities will have to manage as they seek to achieve substantive
progress on the revenue front and move to address rigidities on the spending
side.
RATIONALE FOR THE RATING AFFIRMATION
Colombia's Baa2 rating is supported by a track record of macroeconomic
policies that support the economy's capacity to withstand shocks
and the adjustment that has followed these episodes. Colombia's
policy response to the 2014-16 terms-of-trade shock
contributed to Moody's view prior to the pandemic that key credit
metrics -- e.g., debt ratios, economic
growth -- would improve over time. The quality of macroeconomic
policymaking is recognized by the sovereign's qualification for
a Flexible Credit Line (FCL) with the International Monetary Fund (IMF).
The FCL was expanded this year to $17 billion and will contribute
to the funding of the government's larger financing needs while
still providing supplementary coverage for balance of payments risks.
Moody's notes that this ability and willingness to conduct prudent
policymaking will be tested by the magnitude of the pandemic's economic
and fiscal shock.
Moody's assessment of relatively contained external vulnerability
risks also supports Colombia's credit profile. A floating
exchange rate has contributed to the adjustment of the external accounts
with foreign direct investment continuing to provide a sizable coverage
of the current account deficit. The country has been able to accumulate
foreign reserves, which currently amount to about 20% of
GDP. Reserves, which provide strong liquidity coverage of
upcoming external debt payments, are boosted by Colombia's
access to the IMF's FCL, which provides an additional $12
billion of liquidity support on top of Colombia's $55 billion
foreign exchange reserves.
Colombia's liability management practices have minimized financing
risks, allowing the government to limit the deterioration in debt
affordability metrics. Following an initial spike of cross-border
borrowing costs, external market conditions have improved and Colombia's
funding costs are now lower than at the beginning of the year.
Conditions in the domestic market have improved as well. The return
of nonresident investors, after outflows were reported in March
and April, allowed the government to issue its first 30-year
local bond, contributing to improving its domestic debt profile.
The government has diversified its funding sources with increased resources
coming from multilateral institutions, including a $5 billion
drawdown from its FCL at very favorable terms.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental risks for Colombia are related to its exposure to physical
climate risk in the form of flooding and extreme precipitation caused
by the La Niña weather phenomenon that can affect the agricultural
sector. Additionally, given the high share of hydrocarbons
in exports, Colombia is exposed to carbon transition risks over
the longer term.
Social risks are material for Colombia. Despite progress in poverty
reduction achieved over the past two decades, persistently high
levels of rural-urban income inequality could be a potential source
of social unrest. Colombia faces moderate challenges in the provision
and quality of education, housing, health and safety and access
to basic services. Additional risks related the implementation
of the peace agreement with the FARC and the large influx of Venezuelan
migrants into Colombia adds pressure to the government's fiscal balance
because of higher social spending, although in both instances there
could be medium term positive effects on the economy by supporting increased
investment and productivity. Moody's also regards the coronavirus
outbreak as a social risk under its ESG framework, given the substantial
implications for public health and safety.
Governance considerations, including issues such as rule of law
and control of corruption, inform Moody's view of Colombia's moderate
institutional framework. The government maintains a strong track
record of effective fiscal and monetary policymaking.
GDP per capita (PPP basis, US$): 15,334 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.3% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.8%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -2.4%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.2% (2019 Actual)
(also known as External Balance)
External debt/GDP: 42.7% (2019 Actual)
Economic resiliency: baa1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 30 November 2020, a rating committee was called to discuss the
rating of the Colombia, Government of. The main points raised
during the discussion were: The issuer's fiscal or financial strength,
including its debt profile, has materially decreased.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, a rating upgrade is unlikely.
The outlook could return to stable if Moody's were to conclude that
the measures the authorities will implement over the coming years will
prove effective in delivering a material increase in government revenue
while simultaneously addressing expenditure rigidities, elements
that over time would lead to sustained fiscal consolidation and declining
government debt ratios. Rising government revenue would also help
improve debt affordability. Bolstering institutional aspects of
Colombia's fiscal policy framework, in particular elements
that allow the fiscal rule to more effectively support debt sustainability,
would also be credit positive.
Colombia's rating could be downgraded if Moody's were to conclude
that fiscal consolidation efforts are unlikely to lead to the stabilization
and eventual reduction of government debt ratios, as this would
leave Colombia with lower fiscal strength relative to peers. Additional
negative pressure would emerge if the country were to become more reliant
on external debt inflows to finance the current account deficit,
or if increasing external imbalances lead to a weakening of the country's
external liquidity buffers.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Renzo Merino
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD - Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
