Wall Street banks predicted on Thursday that Fitch would downgrade Colombia’s credit rating to “junk” before the end of the year and trigger forced sales after a similar move by S&P Global Ratings on Wednesday.
Colombia is in the spotlight after President Iván Duque was forced to withdraw a tax reform proposal in early May, amid strong opposition from lawmakers and massive protests.
On Wednesday, S&P lowered its long-term foreign currency rating on Colombia to BB + from BBB-, predicting that the fiscal adjustment will be longer and more gradual than expected.
“It is very likely that Fitch will decide to join them once the fate of the fiscal package becomes clear, probably in the third quarter, becoming the second agency to give Colombia an underinvestment rating,” JPMorgan’s Katherine Marney wrote in a note. to clients.
Fitch rates the South American country in the lowest investment grade range, with a negative outlook, while for Moody’s it is two notches above “garbage.”
“The exact timing is tough, and the bottom line is instead that we believe the downgrade is close enough for markets to trade it,” said Morgan Stanley’s Simon Weaver, who also predicts Fitch will be the second-ranked rating agency in degrading Colombia to “junk”.
Goldman Sachs agreed that Fitch would follow suit in the “near future” given the bank’s expectation that political restrictions will prevent “significant” structural tax reform.
Citi said it expected state-owned companies, banks and S&P-rated BBB- by utilities on the sovereign ceiling likely to be downgraded as well.
JPMorgan estimates that Colombia could see more than $ 11 billion of leakage from its fixed income markets by losing its investment grade ratings.
That would include $ 3.2 billion of its hard currency sovereign bonds, $ 3.5 billion of local treasury bonds, as well as $ 4.7 billion of potential investment-grade corporate paper fund outflows.
Morgan Stanley said the impact of a possible total downgrade to Colombia had not yet been incorporated into the forecasts, although there could be a potential forced sale of up to $ 5.1 billion in assets in the country.
Investment grade ratings from various agencies are a condition for listing bonds in many key indices. Junk ratings, meanwhile, prevent some investors from putting money into a country, and downgrades lead to forced sales.
With information from Reuters.
