October 26, 2017 / 4:27 PM / a year ago

Fitch Affirms Colombia at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, October 26 (Fitch) Fitch Ratings has affirmed Colombia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS The 'BBB' rating reflects Colombia's long track record of credible, flexible and consistent macroeconomic policies as well as a record of macroeconomic and financial stability. Colombia's ratings are constrained by high commodity dependence, limited fiscal flexibility and structural constraints in terms of low GDP per capita and weak governance indicators compared to peers. Colombia's economy has adjusted to the sharp fall in oil prices and terms of trade have started to improve. After widening to 6.4% of GDP in 2015, the current account deficit fell to 4.3% in 2016. The current account deficit is expected to fall further to 3.8% of GDP in 2017, largely due to a pick-up in exports driven in part by higher average oil prices as well as solid performance of non-traditional exports. Inflation fell to within the central bank's 3+/-1% target in 2017, after rising to nearly 9% in July 2016 partly as a result of the sharp peso depreciation. Year-end inflation is expected to continue to fall to 3.6% in 2018. However, the economic adjustment has entailed an extended sharp slowdown in growth. Colombia's economy is expected to grow by just 1.9% in 2017 after growing by 2% in 2016. Fitch forecasts an acceleration in growth in 2018 to 2.8% as public infrastructure spending picks up and domestic demand improves due to cuts in interest rates. The fiscal deficit is on a downward path and Fitch expects the government to reach its revised central government fiscal deficit target of 3.6%. Its 2018 target of 3.1% of GDP is credible, based on expenditure restraint, especially in capital expenditures, as well as additional revenues from the tax reform that passed in December 2016. Colombia's general government debt to GDP ratio has stabilized at close to 47%. However, further deficit narrowing, as stipulated by the Structural Balance Rule, will prove difficult without additional revenue measures beyond 2018. Further fiscal measures would be needed to begin to reduce the government's debt burden, which is above the 'BBB' median of 42% of GDP, and to increase fiscal room to meet future shocks. Colombia's external debt metrics compare unfavourably to peers. However, Fitch expects Colombia's gross external debt to gradually fall after peaking at 262% of current account receipts in 2016. The reduction in the current account deficit and a substitution of local debt for external debt by the private sector are driving the trend. Colombia's international reserves have gradually increased to just over USD47.5 billion since 2016. In addition, Colombia's external liquidity is supported by an IMF Flexible Credit Line of USD11.35 billion. FDI is expected to cover over fifty percent of Colombia's gross external financing needs of nearly USD19 billion in 2018. A presidential and legislative election cycle begins March 2018. Fitch does not expect major changes to its macroeconomic policy framework from the next administration, no matter who wins the presidency. One of the key policy challenges for the next administration will be the implementation of the peace agreement with the FARC guerrillas in the context of a fiscal adjustment as stipulated by the Structural Balance Rule. 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 Foreign-Currency (LT 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: --Macroeconomic: +1 notch, to reflect Colombia's long track record of prudent and consistent macroeconomic policies. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC 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: --Persistent period of low economic growth that undermines fiscal performance --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 the external debt burden. Future developments that could individually, or collectively, result in a positive rating change include: --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; --A sharp reduction in the country's external vulnerabilities. KEY ASSUMPTIONS Fitch assumes the oil price averages USD52.5 in 2017, USD52.5 in 2018 and USD55 in 2019. Fitch has affirmed Colombia's ratings as follows: --Long-Term Foreign-Currency IDR at 'BBB'; Outlook Stable; --Long-Term Local-Currency IDR at 'BBB'; Outlook Stable; --Short-Term Foreign-Currency IDR at 'F2'; --Short-Term Local-Currency IDR at 'F2'; --Country Ceiling at 'BBB+'; --Issue ratings on long-term senior unsecured foreign-currency bonds at 'BBB'; --Issue ratings on long-term senior unsecured local-currency bonds at 'BBB'. Contact: Primary Analyst Richard Francis Director +1-212-908-0858 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Kelli Bissett-Tom Associate Director +1-212-908-0564 Committee Chairperson Charles Seville Senior Director +1-212-908-0277 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. 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