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Investing.com -- Fitch Ratings has revised Colombia’s Outlook from Stable to Negative while affirming its Long-Term Foreign-Currency Issuer Default Rating (IDR) at ’BB+’.
The revision of the outlook was due to the deterioration in Colombia’s fiscal position and uncertainty about corrective measures. The central government’s fiscal balance for 2024 was 6.7% of GDP, falling short of Fitch’s forecast of 5.6% of GDP. This was primarily due to revenue shortfalls and inability to implement offsetting spending cuts.
Consequently, the general government debt to GDP increased to an estimated 58% from 53% in 2023. Fitch expressed concerns that fiscal risks are leaning to the downside as the government continues to struggle to meet fiscal targets and debt to GDP is projected to rise over the forecast period.
Colombia’s ratings are supported by a history of macroeconomic and financial stability, backed by an independent central bank with an inflation targeting regime and a free-floating currency. However, the ratings are limited by high fiscal deficits and uncertain prospects for consolidation needed to stabilize debt/GDP, a high interest burden, and high commodity dependence.
Fitch foresees difficulties for the government to meet the revised fiscal rule target this year. It projects tax administration efforts to yield 1.4% of additional revenues that Fitch expects is unlikely to be achieved. Given this revenue uncertainty and a worse-than-expected 2025 starting point, Fitch has increased its CG deficit forecasts for both 2025 and 2026 to 6.2% of GDP and 5.8%, respectively.
Fitch projects the consolidated general government debt to continue to increase over the forecast period, reaching 62% of GDP in 2026, up from 57.8% in 2024, and continuing to diverge from the projected 2026 ’BB’ median of 55.4%.
Last year, Congress passed a pension reform that creates solidarity and semi-contributive pillars, with an estimated annual fiscal cost of 0.3% of GDP. Congress also passed a constitutional reform increasing CG transfers to local and regional governments to 39.6% of current revenues from 27.2%.
Fitch expects economic growth to accelerate significantly in 2025 to 2.7% from 1.7% in 2024 due to resilient consumer spending and recovering investment. However, uncertainties about trend growth persist since investment to GDP fell significantly during the pandemic and has only recovered to 17.1% in 2024.
Inflation is expected to continue declining and reach the upper band of the central bank’s 3% (+/- 1pp) target by end-2025 from 5.2% at end-2024. The current account deficit is expected to widen marginally in 2025 to 2.1% of GDP from 1.8% in 2024, well below its 2022 high of 6.1%.
The central bank has accumulated reserves to boost its external liquidity position to USD61.9 billion as of end-2024, with Fitch expecting further accumulation of nearly USD3 billion in 2025. In April 2024, the IMF approved a new two-year flexible credit line of USD8.1 billion for Colombia, which provides an additional buffer that the country has utilized in the past to manage external shocks.
Factors that could lead to a negative rating action or downgrade include a continued deterioration in Colombia’s GG debt-to-GDP ratio, for example from persistently high fiscal deficits and/or weak growth, and deterioration of investment and medium-term growth prospects with adverse social ramifications, such as high unemployment and poverty levels.
On the other hand, factors that could lead to a positive rating action or upgrade include achievement of fiscal consolidation that stabilizes the GG debt-to-GDP ratio and improvement in macro-policymaking that boosts fiscal and monetary credibility and/or growth-enhancing reforms.
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