New York, July 28, 2014 -- Moody's Investor s Service has upgraded Colombia's government
bond rating to Baa2 from Baa3 and changed the outlook to stable from positive.
As part of this rating action, Moody's also assigned a short-term
issuer rating of P-2.
RATING RATIONALE
The key drivers of the upgrade are:
1. Our expectation of continued strong growth dynamics despite
external headwinds and robust long-term growth prospects supported
by the fourth generation (4G) infrastructure investment program;
2. Sound fiscal management that has led to moderate fiscal deficits
coupled with continued compliance with the fiscal rule and our expectation
that this will continue.
FIRST DRIVER
Despite increasingly less favorable external economic and financial conditions,
Colombia continues to post robust growth rates. Last year,
when other countries in the region slowed, Colombia's economy
picked up growing by 4.7% compared to 4.0%
the year before. The economy's performance was supported
in good part by countercyclical measures incorporated in the government's
Plan to Drive Productivity and Employment (PIPE, by its Spanish
acronym). Although the PIPE has ended, our expectation is
for GDP growth to increase by 4.7% again this year.
Looking ahead, 2015 will be the first year of construction within
the government's Fourth Generation of Road Concessions (4G),
a $25 billion infrastructure investment plan that will be mainly
financed through public-private partnerships (PPPs). Moody's
estimates that, as a result of 4G, Colombia's potential
growth rate could increase to 5.0%-5.5%
over the next 5 to 10 years, compared with our current 4.8%
estimate for potential growth. Additionally, we expect GDP
growth will receive a boost from 2016-2020 as 4G-related
construction projects are launched, thereby helping to mitigate
headwinds resulting from less favorable external conditions.
SECOND DRIVER
The Colombian government has complied with the fiscal rule that was first
instituted in 2012. The rule stipulates that the structural fiscal
deficit (which corrects for economic and commodity cycles) must (i) report
a downward trend every year from now to 2022, and (ii) meet specific
targets of 2.3% of GDP in 2014, 1.9%
in 2018, and 1.0% in 2022. Thus far,
the government has complied with the rule, given that the structural
deficit has declined since the rule took effect. In 2012,
the structural fiscal deficit was 2.4% of GDP, it
narrowed to 2.3% of GDP in 2013, and this year,
we expect the structural fiscal deficit to be on the order of 2.3%
of GDP again, which would be sufficient to meet the 2014 target.
The central government's actual deficit was 2.4% of
GDP in 2013 and we expect it will be 2.4% of GDP again in
2014 and 2015, leading to moderate gross financing needs of 4.9%
of GDP this year and 6.2% next year. The Colombian
government continues to have ample access to both domestic and external
financing. Additionally, even though non-resident
participation in the local debt market is currently just 12.6%,
we expect it to increase gradually over the next several years,
becoming an additional source of financing for the government.
Although the government will face increased fiscal challenges as the financial
transactions and wealth taxes expire during this administration and oil
production declines this year, we think the authorities are strongly
committed to the fiscal rule and, therefore, we expect they
will take the measures needed to ensure that the fiscal balance keeps
meeting the terms within it.
It is noteworthy that although the government only implemented the fiscal
rule two years ago, the rule merely institutionalizes sound fiscal
policy that had been in place for years beforehand. Regarding the
government debt structure, Colombia's liability management
strategy has led to an increase in the average maturity of government
debt which currently stands at more than 7 years compared to around 5
years in 2006, while the vast majority of government debt remains
peso-denominated (76%) and fixed rate (94%).
OUTLOOK RATIONALE
The stable outlook captures our view that even though Colombia faces potential
headwinds, the country will be able to weather them without a significant
deterioration of its sovereign credit indicators. In our opinion,
the two key headwinds are: (i) expiration of the wealth and the
financial transactions taxes during this administration, and (ii)
declining growth in oil production as a result of increased pipeline attacks
and persistent community protests.
With regard to the first point, our understanding is that the government
plans to extend these two taxes beyond their original expiration date
of December 2014. Still, those taxes will likely expire at
some point during this administration. Our view is that before
that happens, the government will try to secure passage of a tax
reform to replace the potential revenue loss -- no such
reform has been proposed yet.
With regard to the second point, pipeline attacks have increased
since 2011 leading to oil production reporting declining annual growth.
In 2014, pipeline attacks in combination with community protests
will lead to a contraction of oil production, but we expect production
to pick up again in 2015.
WHAT COULD MOVE THE RATING UP/DOWN
There could be upward pressure on Colombia's rating if: (i)
government revenues which currently stand at around 17% of GDP
rise to a level closer to the Baa median (33%), or (ii) continued
compliance with the fiscal rule leads government debt ratios to decline
on a sustained basis.
Conversely, downward pressure on the rating would develop in the
event of a significant and sustained worsening of the government's debt
position, or if external or domestic shocks lead to a marked deterioration
in the country's balance of payments position.
COUNTRY CEILINGS
Concurrent with today's rating action, Moody's has changed Colombia's
long-term local currency bond and deposit ceilings to A2 from A3,
its long-term foreign-currency bond ceiling to A3 from Baa2,
and its long-term foreign-currency bank deposit ceiling
to Baa2 from Baa3. We raised Colombia's short-term
foreign-currency bond and deposit ceilings to P-2 from P-3.
These ceilings reflect a range of undiversifiable risks to which issuers
in any jurisdiction are exposed, including economic, legal
and political risks. These ceilings act as a cap on ratings that
can be assigned to the foreign- and local-currency obligations
of entities domiciled in the country.
GDP per capita (PPP basis, US$): 11,189 (2013
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.7% (2013 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.9%
(2013 Actual)
Cent. Gov. Financial Balance/GDP: -2.4%
(2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.3% (2013 Actual)
(also known as External Balance)
External debt/GDP: 24.3% (2013 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 23 July 2014, 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 economic fundamentals, including
its economic strength, have materially increased. The issuer
has become less susceptible to event risks. An analysis of this
issuer, relative to its peers, indicates that a repositioning
of its rating would be appropriate. Other views raised included:
The issuer's institutional strength/ framework, have not materially
changed. The issuer's governance and/or management, have
not materially changed. The issuer's fiscal or financial strength,
including its debt profile, has not materially changed.
The principal methodology used in this rating was the Sovereign Bond Ratings
methodology published in September 2013. Please see the Credit
Policy 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 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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
Sarah E Glendon
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's upgrades Colombia's rating to Baa2 from Baa3; outlook stable
