Analysts warn that the last time it took Colombia 12 years to regain this status. But they emphasize that the country will be able to continue accessing financing at a reasonable interest with the current rating from Standard & Poor’s.
This Wednesday Standard & Poor’s (S&P) 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 that it had enjoyed since 2011 and that since then has been one of the main prides of the Colombian economy. Now the question is, how long will it take to regain this status?
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“We believe that Colombia’s fiscal adjustment will be more prolonged and gradual than previously expected, reducing the probability of reversing the recent deterioration in public finances,” S&P said in the statement informing the rating downgrade.
However, for many analysts Standard & Poor’s only made official what the entire market already knew: in fact, a Bloomberg report revealed that Colombian debt in dollars already behaved like “junk bonds” (a financial term that refers to to debt below investment grade), similar to that of Guatemala or Uzbekistan, nations that are three ratings below investment grade. That is, beyond the position of the rating agencies, for investors Colombia had already lost this status.
Therefore, it would not be surprising if the other credit rating agencies also downgrade Colombia’s credit rating. In Fitch Ratings, the country is at BBB- with a negative outlook, so a downgrade would also imply that the investment grade would be lost on this scale. And at Moody’s the country is at Baa2 with a negative outlook, two notches above junk bond territory.
So the loss of investment grade seems like an outdated debate. Now, what matters is to know if the situation can be remedied or if it can even get worse, and the rating agencies have been clear that both options are feasible.
Standard & Poor’s (S&P) 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 ”.
Follow the news of El Espectador on Google NewsBut he also warned that Colombia’s rating could be further lowered “in the next 12 or 18 months due to long-term effects of the pandemic, internal situations or new external shocks that prevent the Colombian economy from recovering in 2021.”
In this way, Colombia must do a lot of work to clean up its finances if it wants to regain investment grade. Which puts even more pressure on the new tax reform that the Government is building through consensus. That is to say, it must solve the weak points, especially those that the rating agencies monitor the most.
What rating agencies don’t like
The level of indebtedness is one of the points that investors analyze the most about the Colombian economy and perhaps the one that now most influences the credit rating. The problem is that debt indicators have visibly deteriorated in the last three years.
Since 2018, Colombian debt went from representing 40% of GDP (close to $ 400 trillion), to more than 60% when it stood at $ 616 trillion by 2021. And while the internal debt rose 39%, going from $ 273 trillion to $ 381 trillion , the external grew 24% in dollars (71% in pesos), going from US $ 48,500 million ($ 137 billion) to US $ 60,000 million ($ 234 billion).
Among the factors that rating agencies take into account, there is also a component that refers to a country’s ability to pass reforms, a measure that shows fiscal adaptability, and the ability to find new resources.
This is why the withdrawal of the tax reform on May 2 was so worrisome in terms of rating. And the discussions of the new bill will also determine Colombia’s ability to pass reforms. But it is clear that it is a complicated task to accomplish in the midst of a national strike, and the increasingly close presidential and congressional elections.
Years of recovery
In reviewing history, there is not much hope that Colombia will manage to raise its rating in a short time. The last time investment grade was lost was in 1999, during the mortgage crisis. And it took the country almost 12 years to regain the status.
Felipe Campos, manager of economic research at Alianza Valores, explains that “being optimistic, assuming that the Government manages to pass a tax reform that provides peace of mind on the nation’s finances, and if oil helps, Colombia could recover the investment grade between 2 and 3 years. However, such a process takes on average around 5 years, it is not easy to correct the factors that caused a reduction ”.
For his part, Sergio Olarte, chief economist at Scotiabank, indicated that “the reason why the country’s investment grade was lowered is because it can be seen that fiscal consolidation, after high indebtedness last year, is being much more slower than projected, making it much riskier to take on Colombian debt in the medium term. In order to return the investment grade to the country, a reform has to be consolidated that allows public debt in foreign currency to be seen to be safer for investors ”.
However, Juan David Ballén, manager of economic research at Casa de Bolsa, highlights that “the long-term interest rates today are much lower than they were 20 years ago, when Colombia also lost investment grade. In 1999 they were close to 20%, and now they are around 7.5%. Which means that we continue to access financing at reasonable rates even though we are in the junk bond arena. “
Ballén clarifies that “it is very difficult to determine when the investment grade can be recovered. The rating was downgraded to BB + with a stable outlook. That detail of leaving the perspective like this (stable) basically means that Standard & Poor’s threw the ball to the Government, everything will depend on its ability to pass structural reforms that allow the country’s finances to be cleaned up ”.
Indeed, we must pay attention to the fact that the rating outlook will remain stable and not positive: it means that S&P is not sure that Colombia will be able to make enough changes in the short term to recover its investment grade. In fact, it also opens the door for the outlook to change to negative if the government does not show results and the internal situation does not improve, increasing the risk that the rating will go down one more notch: from BB + to BB.
The backlash of losing 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 you have this status, there is not so much risk and therefore it can be loaned to you with attractive interest.
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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 this threshold.
Although there is consensus that the loss of the investment grade of Colombia was discounted, in any case certain blows are expected. For example, there was a reaction in the markets, although it was relatively moderate: this Thursday the dollar rose $ 34, an important rise but which has not been the strongest of the year. In fact, it rose more when the withdrawal of the tax reform was known (the day after this news the dollar rose $ 60).
Likewise, Bloomberg reported that “the country’s dollar-denominated bonds maturing in 2031 fell 0.5% to 96.6 cents in the first operations on Thursday in New York, sending its spread over the United States Treasury bonds to 1 , 85 percentage points ”.
The downgrade could also have an impact on the private sector. The ratings of the companies are linked to that of the country, so during the next few weeks it could be seen that important Colombian companies will also see their rating lowered.
For now, the market is waiting for what Fitch Ratings will do, since if it also lowers the rating, it means that Colombia will have lost investment grade in two of the three main rating agencies. The positive is that the large fixed income indices, on which Colombia depends the most, do not have as a rule to invest in countries with this status. Therefore, the reduction should not cause changes in the purchase flows of Colombian debt denominated in dollars.
However, there are certain funds that have as a rule only investing in countries that are investment grade in at least two of the three main rating agencies. But they are not important players, they buy about 5% of the TES according to the reports of Casa de Bolsa.
Perhaps the main blow to losing investment grade is the higher level of monitoring by rating agencies and international investors, and not only due to the evolution of public finances, but also due to the political stability and public order situation in Colombia. .
