Moody’s downgrades Colombia to Baa3, outlook stable

Investing.com -- Moody’s Ratings has downgraded Colombia’s long-term local and foreign-currency issuer and senior unsecured debt ratings to Baa3 from Baa2, while changing the outlook to stable from negative.

The downgrade reflects the expected deterioration of the government’s debt metrics, which Moody’s anticipates will continue over the coming years as fiscal deficits remain high and exceed the limits set by the country’s fiscal rule.

According to Moody’s, the current government has chosen to suspend the fiscal rule despite no economic shock, which negatively impacts the effectiveness of the fiscal policy framework.

The rating agency projects that Colombia’s general government debt burden will reach 59.5% of GDP in 2025, up from 53.4% in 2023. This debt level is expected to peak at 64% of GDP by 2027, exceeding the forecast ’Baa’ median of 62%.

Interest payments represented 16% of revenue in 2024, compared to a ’Baa’ median of 9%, and will increase to 17% in 2025, further weakening debt affordability as Colombia faces high domestic and external borrowing costs.

The stable outlook reflects Moody’s expectation that institutional arrangements will continue to play a stabilizing role over the medium term. The agency also cited Colombia’s economic resilience, projecting GDP growth will return to trend levels of around 3% in coming years.

Colombia’s fiscal situation has worsened more than expected in 2024 and 2025, with revenue underperformance in both years. The central government deficit is projected to reach close to 7% of GDP in 2025, in line with the 2024 deficit.

With elections set for 2026, the government has proposed to adjust the fiscal deficit gradually over three years, which will contribute to the rising debt burden.

Moody’s noted a shift in fiscal policy compliance, departing from Colombia’s track record of prudent policymaking. Between 2022 and 2024, policymakers had maintained commitment to deficit targets, implementing spending cuts when necessary. However, in 2025, authorities announced a three-year suspension of the fiscal rule without the justification of a macroeconomic shock.

The stable outlook is supported by Colombia’s legislative and judicial checks and balances that have limited radical policy shifts. Moody’s expects policymakers and legislators will support corrective measures for fiscal consolidation over the medium term.

Factors that could lead to a rating upgrade include effective policies addressing structural fiscal issues or improving medium-term growth prospects. Conversely, failure to restore fiscal consolidation or regulatory changes undermining investor confidence could lead to further downgrades.

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