Colombia fiscal revisions spark market concern, up risk of rating loss

RIO DE JANEIRO, BRAZIL – Colombia’s plan to finance its fiscal needs this year with ever-swelling debt has sparked market concern and may herald the loss of the Andean country’s investment-grade credit rating, analysts and investors say.

The Finance Ministry last week revised 2021 fiscal targets, deepening its prediction for a central government budget deficit to 8.6% of GDP amid ongoing economic fall-out from the coronavirus.

The new deficit prediction was steeper than estimates by analysts, disappointing their hopes that the worst – a 7.8% GDP deficit last year – had already passed and underlines how Latin America’s few investment grade countries are struggling to avoid getting downgraded as the pandemic lingers.

“The publication of the fiscal plan could have two repercussions – the immediate one is an increase in aversion to risk in the fixed income market,” Bancolombia said in a note.

“That pressure could extend to foreign currency securities, not only because it could increase the available amount of that type of paper but because this announcement comes at a time of tension for U.S. Treasury bonds.”

The ministry would not specify how much in foreign bonds it plans to issue this year.

Reaction was swift – Colombian dollar-denominated bonds coming due in 2029 and 2030 fell 1.2 cents and 2 cents respectively on Friday, to their lowest level in eight months.

“There’s a lot of mystery – they should be really clear with investors about what (the ministry) is going to do,” said a market maker source.

Local investors will only have the capacity to absorb up to 42% of internal debt issued this year, according to asset manager Corficolombiana, leaving the majority to foreign buyers or the central bank and pushing interest rates higher.

The ministry’s prediction that Colombia’s debt level will take until 2031 to drop to 59.7% of GDP from 64.8% particularly spooked analysts, who warned that it may provoke downgrades from ratings agencies with already negative outlooks.

“The fiscal plan increased the probability of a rating cut and the loss of investment grade rating,” said Camilo Perez, head economist at Banco de Bogota. “The question is when.”

Brokerage Credicorp Capital predicts the downgrade will come either in the fourth quarter or the first half of 2022.

What was supposed to be a temporary suspension of Colombia’s fiscal deficit limit also risks becoming permanent, analysts said.

“These numbers aren’t consistent with compliance with the fiscal rule from 2022,” said Andres Pardo, head of Latin American strategy for XP Investments. “That means the government might ask for a rule suspension extension not just for 2022 but for 2023.”

The amount that could be raised by a promised tax reform, to go to congress just ahead of 2022 legislative and presidential elections, is also in doubt.

The ministry said last week the reform would seek to raise funds equivalent to 1.5% of GDP, less than the 2% discussed last year, possibly feeding rating agency doubts.

“Getting to 1.5% is already challenging, you add the political issues, the current economic and social situation in the worst crisis Colombia has had in 100 years,” Pardo said. “It will be really tough.”