NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Colombia's ratings as follows:
--Long-term foreign currency (FC) Issuer Default Rating (IDR) at 'BBB-';
-- Long-term local currency (LC) IDR at 'BBB';
--Short-term FC IDR at 'F3'.
--Country Ceiling at 'BBB'
The Outlook is revised to Positive from Stable.
KEY RATING DRIVERS
The Outlook Revision reflects Colombia's increased resilience due to strengthening external accounts and favourable government debt dynamics. As a result of continued international reserve accumulation, Fitch expects Colombia to become a net sovereign external creditor in 2013. In addition, government debt burden continues to decline driven by fiscal consolidation and economic growth. General government debt, at an estimated 36.3% of GDP in 2012, is in line with the 'BBB' median. Lower interest burden, increased capital spending are reflecting improving trend in the composition of public spending, while the recent passage of the tax reform highlights the commitment of the government to make progress on the structural aspects of the cumbersome tax code.
The affirmation of Colombia's sovereign ratings reflects the following key rating factors:
Colombia's ratings are underpinned by its prudent policies, solid debt repayment record and strong macroeconomic performance compared to peers. These credit strengths are balanced by the government's narrow revenue base, and structural constraints such as low income per capita and high commodity dependence.
The economy has slowed to an estimated 3.6% in 2012 from 5.9% in 2011. However, five-year average growth performance remains stronger than 'BBB' peers. In addition, inflation record of Colombia continues to consolidate with inflation averaging 3.2% in 2012, close to target set by the central bank.
Macro imbalances are moderate with the current account deficit fully financed by foreign direct investment. Moreover, fast credit expansion in 2010 and 2011 has moderated in 2012 partly due to policy measures such as interest rate hikes and increased provisioning requirements, thus reducing potential risks to macroeconomic and financial stability.
The government obtained congressional approval for a tax reform proposal that aims at reducing inequality and increasing labor formalization. The net effect of the reform on revenues is likely to be neutral. Fitch considers that Colombia's narrow and relatively volatile revenue base continues to hamper faster consolidation and policy flexibility.
Colombia's low GDP per capita, relatively weaker governance indicators in relation to investment grade peers and limited trade openness represent key credit weaknesses of the sovereign's credit profile.
RATING SENSITIVITIES
Positive: The Positive Outlook reflects that the following risk factors may, individually or collectively, result in an upgrade of the ratings by up to one notch:
--Continued resilience to external shocks and greater confidence in sustainability of the medium-term growth prospects.
--Improved external balance sheet underpinned by strengthening of the country's international liquidity position and consolidation of its net sovereign external creditor status.
--Favourable debt dynamics, underpinned by fiscal consolidation and a positive growth performance, leading to continued improvement vis-a-vis rating peers.
Negative: The current rating Outlook is positive. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating downgrade. However, future developments that may, individually or collectively, lead to a stabilisation of the Outlook include:
--Persistent fiscal deterioration leading to negative debt dynamics.
--A material erosion in the country's growth prospects.
KEY ASSUMPTIONS
Fitch assumes that the current economic slowdown is cyclical in nature and growth is likely to return to its potential (between 4 - 5%) over the forecast period. Fitch expects authorities to continue moving forward with measures to improve competitiveness and economic diversification.
Fitch expects Colombian authorities to continue managing the favourable dynamics in the commodity sector in a manner consistent with medium-term macroeconomic stability and further reducing fiscal and external vulnerabilities.
Fitch expects that Colombia's internal conflict will not materially constrain the positive investment and overall performance of the economy.
Fitch assumes that China will avoid a hard-landing and commodity prices, especially oil will remain at relatively high levels. The agency assumes that the eurozone remains intact and that there is no materialisation of severe tail risks to global financial stability that could trigger a sudden stop to capital inflows to emerging markets and a sharp decline to commodity prices. Such a scenario could dampen Colombia's rating momentum.
Additional information is available on www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Sovereign Rating Criteria' (Aug 13, 2012)
Applicable Criteria and Related Research
Sovereign Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685737
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