Home loans will no longer be historically cheap, the cost of living would rise due to the higher prices of imported goods, and the Government will have less fiscal freedom to help the millions of Colombians hit by the pandemic.
On May 19, Colombia lost one of the main prides of the Colombian economy: investment grade. The status left after Standard & Poor’s (S&P) downgraded our rating from BBB- to BB + with a stable outlook, which means that Colombian debt in dollars is in junk bond territory (financial term that defines bonds rated below investment grade). Although this is macro news from the world of global finance, it will also have repercussions on the ordinary citizen: on a day-to-day basis.
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For most 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, similar to that of Guatemala and Uzbekistan, nations that They are three ratings below investment grade. That is, beyond the position of the rating agencies, for investors Colombia had already lost this status.
In this way, Colombians have been living without investment grade for several months. It was already discounted. This is why the announcement of the downgrade generated relatively little noise in the markets. In fact, the dollar rose more when the withdrawal of the tax reform was known (it rose more than $ 60) than when the debt fell to junk bond territory ($ 30).
While the short-term effects are largely discounted, neither relief nor victory should be claimed that the economy emerged well from the rating downgrade. The last time it took Colombia twelve years to regain investment grade (from 1999 to 2011), and the most optimistic forecasts indicate that this time it would take us at least two or three years to regain a BBB- rating. In other words, Colombians still have to face the medium-term consequences of the debt being in junk bond territory in the coming years. What will happen?
Sergio Olarte, chief economist at Scotiabank Colpatria, explains that “losing the investment grade could cause a good part of the companies that had planned to increase their investment in the country to now think twice, which could impact employment. In addition, the dollars entering the economy could be reduced, which can keep the exchange rate high or even raise it higher. What would increase the price of imported goods from the family basket and, consequently, would raise inflation or the cost of living of the ordinary citizen ”.
Indeed, one of the fears of losing investment grade, added to the political and social tensions facing the country, is that the business climate in Colombia will worsen. Therefore, investment slows down, damaging the recovery of the labor market. And it should be remembered that in 2020 the country lost 2.44 million jobs due to the pandemic.
The dollar can also increase the cost of living for Colombians, since according to the Raddar firm, 15% of the family basket is imported goods. Which contributes to the inflationary pressures that analysts have already been warning about. It is not just any effect, as it has the potential to impact the lives and even the dreams of thousands of Colombians.
Felipe Campos, manager of economic research at Alianza Valores, explained that “it is likely that within a few months we will stop seeing historically low interest rates to buy a home. And we do not know when they will return, it may be a long time before we see these levels again. Due to inflation pressures, the Banco de la República could raise its interest rate earlier than we had thought. In fact, it is not a phenomenon only in Colombia, since global inflation is also rising ”.
Nobody is clear when the Banco de la República will move its interest rates to adjust to changes in inflation, but everything indicates that in the medium term housing financing will no longer be so cheap.
For this reason, Olarte recommends: “This is the time to buy a home, as interest rates are expected to rise. And you have to try to borrow at fixed rates, since the rate of loans in UVR will be the ones that will feel the effects of inflation the fastest. However, there is still time to take advantage of this unique opportunity to buy a home ”.
All these effects on the ordinary citizen will be combined with the consequences of having a Government with a new financing panorama. Although there is consensus that Colombia will continue to be lent, and that rates were already at junk bond levels for months, there will be a blow to public finances. Which can translate into less fiscal freedom to help the millions of Colombians hit by the pandemic.
It is precisely for this reason that the new tax reform that the Government is building through consensus will also be an issue of interest to Colombians. Its approval, and the collection it achieves, will not only establish how quickly we will return to investment grade, but will also determine how limited the state subsidies will be.
In fact, the Minister of Finance, José Manuel Restrepo, said that for now there is only a budget until June for the Ingreso Solidario program, which benefits three million of the poorest households in the country with $ 160,000 a month.
Thus, Colombians should prepare to live for at least a couple of years in a country without investment grade; that is, in an economy where there would no longer be a one-time opportunity to buy a home at historically low interest rates, where the cost of living will rise because of imported goods, and with more limited state aid and subsidies.
