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Rating Action:

Moody's changes Colombia's rating outlook to negative; Baa2 ratings affirmed

 The document has been translated in other languages

22 Feb 2018

New York, February 22, 2018 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Colombia's ratings to negative from stable. Concurrently, Moody's affirmed Colombia's issuer and senior unsecured ratings at Baa2, its senior unsecured shelf ratings at (P)Baa2, and its short term issuer rating at P-2.

The change in the outlook on Colombia's ratings was driven by the following factors:

(1) Expectation of a slower pace of fiscal consolidation and weakening fiscal metrics

(2) The risk that the new government, post presidential elections, will not have an effective mandate to pass additional fiscal measures to preserve Colombia's fiscal strength

Moody's decision to affirm the Baa2 ratings reflects the strength of Colombia's credit profile, and relatively low external vulnerability. On several rating factors, including growth, economic size, and institutional factors, Colombia's credit metrics remain in line with Baa2-rated peers.

The country ceilings remain unchanged. The long-term foreign currency bond ceiling remains at A3, while the short-term foreign currency bond ceiling remains unchanged at P-2. The long-term foreign currency deposit ceiling is unchanged at Baa2, and the short-term foreign currency deposit ceiling is unchanged at P-2. The long-term local currency bond and deposit ceilings remain unchanged at A2.

RATINGS RATIONALE

RATIONALE FOR CHANGING THE OUTLOOK TO NEGATIVE FROM STABLE

FIRST DRIVER -- Expectation of a slower pace of fiscal consolidation and weakening fiscal metrics

Although Moody's projections indicate that the fiscal deficit will decline to 3.3% of GDP this year from 3.6% in 2017, weaker growth and lower fiscal revenue will likely result in a slower pace of fiscal consolidation than the one contemplated in the latest medium-term fiscal framework. The rating agency foresees the fiscal deficit remaining around 3% of GDP in 2018-19. Reaching the fiscal deficit target of 2.1% of GDP in 2019 will be challenging given Colombia's rigid spending structure. Repeated cuts to investment also seem difficult given low levels of central government investment, around 2% of GDP, and the impact of such cuts on growth prospects. In the last five years, government debt-to-GDP increased to an estimated 47% in 2017 from 35% in 2012, in part due to the valuation effect of the large exchange rate depreciation. Moody's expects government debt to peak this year around 48% of GDP and to remain at this level for the next 2-3 years. Similarly, interest payments-to-revenue at the central government level will remain elevated at around 20%. At the general government level, interest payments-to-revenue will remain close to 12%, still higher than the 8% median for Baa2-rated peers.

SECOND DRIVER -- The risk that the new government, post presidential elections, will not have an effective mandate to pass additional fiscal measures to preserve Colombia's fiscal strength

It is uncertain whether the new government will have an effective mandate to implement fiscal reforms. Following the presidential elections in May, the incoming government will likely need to enact policy measures both on the spending and revenue side to reduce Colombia's fiscal deficit on a sustained basis and keep the debt burden in line with peers. This may prove challenging if the new government emerges with a weak mandate for fiscal consolidation. Although Moody's expects a degree of policy continuity following the elections, political polarization may hinder the new government's ability to implement fiscal reforms to preserve Colombia's fiscal strength and put the debt burden on a downward trajectory.

RATIONALE FOR AFFIRMING COLOMBIA'S GOVERNMENT RATINGS AT Baa2

Although Moody's expects negative pressure on Colombia's rating over the next 12 months, these pressures are balanced against the overall strength of Colombia's credit profile, including economic and institutional strength and relatively low external vulnerability. On several rating factors, including growth, economic size, and institutional factors, Colombia's credit metrics remain in line with Baa2 peers. Average real GDP growth, at 3.1% in 2012-2021, is still in line with the Baa2 median. Moody's assessment of moderate institutional strength is in line with the median for similarly rated peers. There is also relatively limited external vulnerability risk given Colombia's flexible exchange rate, stable stock of foreign exchange reserves, and rising external liquid assets of the general government.

WHAT COULD CHANGE THE RATING UP/DOWN

Colombia's ratings would be downgraded if the growth outcomes were to remain below potential and if the new government were unable to present a credible plan for medium-term fiscal consolidation, or is unable to garner support in Congress for the additional fiscal measures under such a plan. This would likely weigh on investor sentiment and growth, which in turn would contribute to a further erosion in Colombia's fiscal strength.

Given the assigned negative outlook, a rating upgrade is unlikely in the near future. Moody's may change the outlook on Colombia's rating back to stable if the next government were to implement a comprehensive package of fiscal measures to reduce the fiscal deficit and limit further erosion of fiscal strength. Greater clarity over fiscal reforms would also contribute to restoring investor confidence and be credit positive by supporting growth prospects. A pick-up in economic growth above 3% will also improve debt dynamics and contribute to positive pressure on the rating.

GDP per capita (PPP basis, US$): 14,126 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 2% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 5.7% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -4% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -4.4% (2016 Actual) (also known as External Balance)

External debt/GDP: 42.5

Level of economic development: High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 16 February 2018, a rating committee was called to discuss the rating of the Government of Colombia. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially decreased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. 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 ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Samar Maziad
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 Risk
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

No Related Data.
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