Moody’s Says Colombia Taking Fiscal Rule ‘Very Close’ to Limit

(Bloomberg) -- Moody’s Investors Service is closely monitoring how Colombia’s worsening fiscal situation will affect its long-term sustainability after the government said its budget deficit and debt will widen this year.

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Colombia’s room for maneuver is “very reduced” in case the government faces a shock such as lower fiscal revenue or higher unexpected spending, Renzo Merino, a sovereign credit analyst, said in an interview Friday.

“If we were talking about soccer, it’s as if the government is playing very close to the limit,” Merino said. “If we see that the fiscal policy that will be adopted in the coming years has an upward trend, that could increase the negative pressures on the credit profile.”

Colombia’s fiscal deficit and debt-to-GDP ratio will widen to 5.3% and 57% of GDP, respectively, showing a sharp deterioration compared to last year, but they would still meet the targets of the so-called fiscal rule, according to Finance Minister Ricardo Bonilla.

Moody’s grades Colombia at Baa2, the second-lowest investment grade, with a stable outlook, while Fitch Ratings and S&P Global Ratings rate the Andean nation’s foreign debt as junk.

Needed Slowdown

The government estimates economic growth will be at less than 2% this year after an extraordinary recovery in the aftermath of the pandemic.

Merino said the economic slowdown was needed to adjust the government’s fiscal and current account deficits. Still, Colombia needs to recover its long-term growth of above 3%, with private investment as the main booster.

“There has been uncertainty about the policies of the current administration and what they imply for the economic model,” the analyst said. “We are not yet at a point where we can say that this slowdown is a structural issue.”

Moody’s stance contrasts with S&P Global’s decision last month to lower the nation’s outlook to negative on economic growth concerns.

Read more: S&P Cuts Colombia Outlook to Negative on Weak Growth

Investment Grade

Colombia has a solid track record of predictable macroeconomic policies with resilient economic strength and robust institutional checks and balances that support prudent macroeconomic policymaking, but the government’s weakness lies in its relatively high interest burden compared with Baa-rated peers, Moody’s said in its most recent credit opinion.

Investors were concerned that when President Gustavo Petro won the election in 2022, the nation would transform its conservative economic model, but some institutional decisions, including court ruling, have steered clear of radical changes, he said.

The nation’s metrics aren’t too far from those of countries with similar ratings, with an average general debt to GDP of about 55%. Moody’s estimates that the fiscal deficit in Mexico, which is also rated at Baa2, will also widen to 5.3% of GDP this year.

“Our methodology tells us that Colombia’s credit profile is aligned with one that could have a rating of Baa1 to Baa3,” in the spectrum of investment grade, he said.

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