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Fitch Affirms Colombia at 'BBB'; Outlook Revised to Stable
March 10, 2017 / 5:00 PM / 9 months ago

Fitch Affirms Colombia at 'BBB'; Outlook Revised to Stable

(The following statement was released by the rating agency) NEW YORK, March 10 (Fitch) Fitch Ratings has affirmed Colombia's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB'. The Rating Outlook was revised to Stable from Negative. The issue ratings on Colombia's senior unsecured Foreign- and Local-Currency bonds are also affirmed at 'BBB'. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at 'BBB+' and the Short-Term Local and Foreign-Currency IDRs at 'F2'. KEY RATING DRIVERS The Outlook revision to Stable reflects the reduction in macroeconomic imbalances as a result of the sharp reduction in the current account deficit, diminished uncertainties surrounding Colombia's fiscal consolidation path due to passage of tax reform measures in December 2016, and the expectation that inflation converges towards the central bank's target. The disciplined policy response to increased pressures following the slump in commodity prices should help in keeping macroeconomic imbalances in check during the forecast period. In spite of expenditure containment and cuts, and generation of non-tax oil revenues, the complete loss of the central government's oil income (3.2% of GDP between 2013-16), rising interest payments and expenditure rigidity resulted in a central government deficit of 4% of GDP in 2016, up from 3% in 2015. Fitch expects the government to meet its 3.3% of GDP target in 2017 due to the tax measures passed in 2016. The tax reform measures included an increase in the VAT rates to 19% from 16% and an extension of the financial transaction tax that was previously due to begin to be phased out in 2019. Despite the tax reform, cost containment measures will likely prove key to meeting its fiscal deficit target over the medium term. A higher deficit and the COP's sharp depreciation have negatively impacted Colombia's debt metrics, as gross general government debt reached nearly 50% in 2016, nearly 10 pp above the 'BBB' median. Fitch expects debt to stabilize over the forecast period given the gradual pace of fiscal consolidation and some modest COP appreciation. However, debt is likely to remain well above the 'BBB' median over the forecast period. Deft liability management has improved currency, refinancing and interest rate risks. Colombia's external adjustment has been faster than expected with the current account balance falling to 4.4% of GDP in 2016 from 6.5% in 2015. Fitch expects further improvement in 2017 with the current account deficit falling to 3.6% of GDP in 2017 largely as a result of export growth. Despite the adjustment, Colombia's gross and next external debt compares unfavorably to 'BBB' peers in terms of current external receipts (CXR) after the sharp drop in oil exports since 2014. Net external debt in terms of CXR, reached 46% in 2016, more than triple the level in 2014 and significantly above the 'BBB' median of less than 1%. Colombia's external buffers remain adequate, as international reserves stand at nearly USD47 billion, or nearly nine months of current external payments. Furthermore, the IMF and Colombia have extended the USD11.5 billion Flexible Credit Line (25% of current international reserves) to reduce risks to increased financial volatility and the increased participation of non-residents in the local market. Colombia's track record under its inflation-targeting regime, exchange rate flexibility, and sound banking system have underpinned its capacity to absorb external shocks and maintain broad macroeconomic and financial stability. Annual inflation reached 5.7% in 2016 after peaking at 8.9% in July, after the central bank raised policy rates by a cumulative 300 basis points between September 2015 to August 2016. Fitch expects that monetary policy will remain focused on bringing down inflation to the target range of 3+/-1%. Economic growth reached just 2% in 2016, down from 3.1% in 2015, reflecting tight monetary policy and weak export performance. Fitch expects growth to modestly pick-up to 2.3% on the back of higher exports and investment, including a ramp up of the 4-G infrastructure program, as well as monetary easing, despite the drag from fiscal consolidation. Colombia finalized a peace agreement with the FARC. The implementation of a peace agreement could provide a confidence boost in the short-term and bring medium to long term benefits (such as improved investment in agriculture and energy) that could boost growth prospects. However, the agreement will likely increase spending pressures over the medium term as well, highlighting the importance of the need of the government to rebuild its revenue base without jeopardizing fiscal consolidation needed to stabilize the government debt dynamics. The 'BBB' rating balances Colombia's flexible and credible policy framework, improved external buffers and a record of macroeconomic and financial stability against high commodity dependence, limited fiscal flexibility and structural constraints in terms of low GDP per capita and weak governance indicators. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Colombia a score equivalent to a rating of BBB- on the Long-term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: --Macroeconomics: +1 notch, to reflect macroeconomic policy consistency and credibility that have underpinned Colombia's capacity to adjust to both domestic and external shocks while maintaining macroeconomic and financial stability. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centered averages, including one year of forecasts, to produce a score equivalent to a long-term foreign currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that could individually, or collectively, lead to a negative rating change include: --Failure to reduce the fiscal deficit and stabilize the government's debt burden; --Re-emergence of large external imbalances that lead to continued increase in external debt burden; --Persistent period of low economic growth that undermines fiscal performance and support for the government's macroeconomic policy framework. Future developments that could individually, or collectively, result in a positive rating change include: --A sharp reduction in the country's external vulnerabilities; --Fiscal consolidation that results in a significant reduction of the public debt burden; --Higher growth prospects that supports improved debt dynamics and improves Colombia's income gap with higher-rated sovereigns; KEY ASSUMPTIONS --Fitch assumes the oil prices average USD52.5 in 2017 and USD55 in 2018. Contact: Primary Analyst Richard Francis Director +1-212-908-0858 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Erich Arispe Director +44 20 3530 1753 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1020398 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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