(Fitch Ratings, 22.Jul.2020) — Colombia’s sovereign metrics have deteriorated further since its April downgrade to ‘BBB-‘, underpinning the range of downside risks reflected in the country’s Negative Rating Outlook, says Fitch Ratings. The growth outlook and debt trajectory are particularly key for the rating, with growth facing significant downside risks from heightened uncertainties related to the global coronavirus pandemic.
Fitch forecasts Colombian real GDP to contract by 6.9% in 2020, This is a marked deterioration from an earlier forecast of negative 4.5% and reflects an extension of the country’s partial lockdown and more severe restrictions in Bogota. We continue to expect growth to bounce back in 2021, to 4.9%. However, due to the difficulty in projecting the coronavirus pandemic’s trajectory, our forecasts are subject to a higher level of uncertainty than usual. A second wave of coronavirus infections and associated lockdowns could affect growth next year. High unemployment and business failures could have a longer term effect on the pace of economic recovery and potential growth.
We expect Colombian general government debt to increase sharply to nearly 59% of GDP this year from 45% at YE19. This would diverge markedly from the current ‘BBB’ median, which we forecast to be 52% at YE20 versus 42% in 2019. The historical ‘BBB’ median is 36% of GDP.
When we downgraded Colombia to ‘BBB-‘/Negative in April, we highlighted risks to growth and the general government debt trajectory as key factors for maintaining the Negative Rating Outlook. In particular, three key factors individually or collectively pose risks to the investment-grade rating. These include: a failure to achieve fiscal consolidation to stabilize and eventually reduce government debt, a reduction in medium-term growth prospects and sustained large external balances that lead to a continuous rise in the net external debt burden.
A return to the fiscal rule that was suspended for 2020-2021 due to the severity of the economic contraction will be necessary to stabilize and begin to reduce the debt burden and boost credibility of the fiscal rule framework. However, a credible fiscal consolidation process is not the only key factor that would help to stabilize the rating. A return to sustained economic growth above 3% will also be key. As such, reform measures that can boost potential economic growth over the medium term will also be under focus.
Colombia has a history of passing tax reforms after an economic shock as well as a long record of prudent and consistent macroeconomic policies. Improved popularity for President Ivan Duque through the coronavirus crisis could help the government pass difficult reforms in Congress through the middle of 2021. However, an election cycle in 1H22, which includes Congressional elections and a presidential primary in March and May 2022, respectively, could limit the time to pass major reforms before campaigning begins in earnest in 4Q21.