S&P downgraded Colombia from BBB- to BB + with a stable outlook. The rating agency justified the reduction in that the country’s fiscal adjustment will be more prolonged and gradual than previously expected. The investment grade was obtained in 2011.
Standard & Poor’s (S&P) reported that it lowered Colombia’s risk rating for long-term debt in foreign currency from BBB- with a negative outlook to BB + with a stable outlook. In other words, the country lost its investment grade , a title it obtained in 2011 and which since then had been one of the main prides of the Colombian economy.
“We believe that Colombia’s fiscal adjustment will be longer and more gradual than previously expected, reducing the likelihood of reversing the recent deterioration in public finances. Therefore, we lowered our long-term foreign currency rating on Colombia to BB + from BBB-, ”S&P reported.
Also read: For investors, has Colombia already lost investment grade?
However, the rating agency assured that the outlook is stable, “which reflects our opinion that the economic recovery, together with certain fiscal measures, will stabilize the recent worsening of the government’s debt burden over the next two or three years.” .
The stable outlook, according to the rating agency, responds to the expectation of economic recovery in 2021 after the significant contraction in 2020. “It is likely that the combination of renewed GDP growth and certain fiscal measures will gradually reduce Colombia’s fiscal deficits, which it will result in the net debt of the general government stabilizing above 60% of GDP ”.
The perspective that the rating agency gave Colombia also includes the expectation of an institutional solution to “the recent and significant social unrest”, as it is worth remembering that the country has completed 22 days of unemployment in which there have been clashes between protesters with the public force and blockades in various areas of the country. S&P believes that if the situation in Colombia is resolved “they would result in perspectives of political and institutional stability for the medium and long term.”
In this regard, José Manuel Restrepo, Minister of Finance said that “the rating agency S&P lowered Colombia’s risk rating by one notch due to the expectation of a more gradual and prolonged fiscal adjustment in the context of the challenges posed by the pandemic. Although this may raise the costs of interest rates, of public and private financing in Colombia, as has happened in anticipation in the markets these days, the country continues and will continue to obtain financing, as demonstrated in recent placements ”.
Follow the news of El Espectador on Google NewsRestrepo added that despite the rating agency’s decision, a second decision was to improve Colombia’s outlook from negative to stable, “based on the growth prospects of the economy demonstrated in the third quarter and the agreement that is being built on measures that allow to stabilize the trajectory of public finances in the medium term ”.
The head of the portfolio assured that the commitment as a Government is to continue working on three fronts. “First, accelerate the growth of the economy, the reactivation and the generation of employment. Second, to advance in efforts to reach consensus that allow the financing of social programs. Third, the stability of public finances. These are the pillars that we will continue to develop to maintain the confidence that, historically, the markets have had in our country ”.
The rating agency also mentioned that it could lower Colombia’s ratings further between the next 12 to 18 months due to long-term effects of the pandemic, other internal developments or new external shocks that prevent the Colombian economy from recovering in 2021.
“Most likely, such a scenario will result in consistently higher fiscal deficits than currently projected and a steady increase in the government’s debt burden, leading to a rating downgrade. A perceived deterioration in the institutional effectiveness of Colombia, evidenced by the inability to form a political and social consensus to sustain growth and its fiscal profile, could also lead to a downgrade ”, added the rating agency.
Standard & Poor’s (S&P) also said it could raise Colombia’s rating, and regain investment grade, if economic growth is faster than expected, along with structural fiscal measures that reduce Colombia’s fiscal financing gap, the debt burden and strengthen public finances. “A broader and more diverse export sector, which helps reduce external vulnerability and strengthen economic resilience, could also lead to improvement in the medium and long term.”
The Colombian rating of long-term debt in foreign currency was BBB- with a negative outlook at Standard & Poor’s and is maintained by Fitch Ratings. And in Moody’s the note is at Baa2 with a negative outlook, that is, it is two steps above investment grade.
Sergio Olarte, Scotiabank Colpatria chief economist, said the decision generates a higher level of interest rates. However, “there are three entities that qualify us and in two of them the country is still with investment grade. Surely the markets will become very volatile and think that, if Colombia is not investment grade, surely the interest rates which they lend to the Government in dollars should rise, affecting or permeating domestic interest rates ”.
The economist added that the reason why the country’s investment grade was lowered is “because it is seen that fiscal consolidation, after a high debt last year, is being much slower than projected, making it much more risky to take Colombian debt in the medium term. In order to return the investment grade to the country, a reform has to be consolidated that allows the public debt to be seen to be safer for investors, this in foreign currency ”.
For most analysts the investment grade loss was already discounted. In fact, a Bloomberg report revealed that Colombian dollar debt already behaved like “junk bonds” (financial term), similar to that of Guatemala or Uzbekistan, nations that are three ratings below investment grade.
That is to say, beyond the position of the rating agencies, for investors, Colombian debt has already behaved for weeks as if the loss of its investment grade were a fact.
What does it mean to lose investment grade?
The investment grade is simply a threshold on a grade table that determines a minimally acceptable grade, similar to the 3.0 that in many universities establishes who passes a subject or not (even if it is scratching). But in the world of global finance, that threshold determines which country has reasonable standards of economic and reputational strength with its creditors. That is, if it is investment grade, there is not so much risk and therefore it can be loaned with attractive interest (the more steps it is above investment grade, the less interest it pays).
However, it must also be recognized that there is a very dynamic market for sub-investment grade debt: these securities are called “junk bonds” (financial term). But it is clear that this credit world has different and special parameters and conditions, which are adapted to the higher level of risk. For this reason, it is assumed that it is cheaper for nations to finance themselves when they are above investment grade.
