Colombia Outlook Revised To Negative On Increased Risks To External Liquidity, Debt, And Growth; Ratings Affirmed

  • The recent drop in oil prices, compounded by the negative global impact of COVID-19, has weakened Colombia's external profile through lower export earnings and a wider current account deficit, and heightened concerns about its economic growth prospects.
  • There is risk that negative external shocks could undermine GDP growth prospects, contributing to worsening public finances, or pose further risks to Colombia's external liquidity.
  • We are revising our outlook on the long-term ratings to negative from stable and affirming our ratings on Colombia.
  • Our 'BBB-/A-3' foreign currency and 'BBB/A-2' local currency sovereign ratings reflect Colombia's track record of cautious macroeconomic management and monetary flexibility, which should partially mitigate external shocks.

Rating Action

On March 26, 2020, S&P Global Ratings revised its outlook on the long-term ratings on Colombia to negative from stable. At the same time, we affirmed our 'BBB-/A-3' foreign currency and 'BBB/A-2' local currency sovereign credit ratings on Colombia. We also affirmed our 'BBB+' transfer and convertibility (T&C) assessment.

Outlook

The negative outlook indicates our view of downside risks to Colombia's fiscal and external metrics over the next 18 months. The recent drop in oil prices, along with the wider negative global impact of COVID-19, has weakened Colombia's external profile through lower export earnings and a wider current account deficit, and heightened concerns about its economic growth prospects.
Downside scenario
We could lower the sovereign ratings if the negative external shocks undermine GDP growth prospects, contributing to worsening public finances, or pose further risks to Colombia's external liquidity.
Upside scenario
Conversely, we could revise the outlook to stable if timely and adequate policy measures successfully stabilize the economy, sustain GDP growth prospects, limit the increase in the general government's net debt burden, and contain risks to external liquidity.

Rationale

On March 19, 2020, S&P Global Ratings materially lowered its oil price assumption for 2020. This follows an earlier significant downward revision of its price assumptions on March 9, 2020. Prices for crude oil in spot and futures markets are more than 55% lower than levels observed during the summer of 2019 when prices increased due to rising geopolitical tensions. When we last reviewed Colombia (see "Colombia 'BBB-/A-3' Foreign Currency Sovereign Ratings Affirmed; Outlook Remains Stable," published Oct. 28, 2019), we expected Brent oil prices to average $60 per barrel (/bbl) in 2020 and to gradually decline to $55/bbl from 2021. We now assume an average Brent oil price of $30/bbl in 2020, $50 in 2021, and $55/bbl from 2022 (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020).
Oil prices plummeted following OPEC's failure to agree on further production cuts during meetings on March 6. OPEC+ did not agree to a proposed reduction of 1.5 million barrels per day (mmbbl/d) to address an expected significant drop in global demand partly due to the spread of the coronavirus. The proposed reduction was in addition to the current 2.1 mmbbl/d production decrease set to expire at the end of March. Shortly after the meetings, Saudi Arabia announced that it was immediately slashing its official selling price and would increase its production to over 12 mmbbl/d in April after the current production cut expires. These actions possibly signal that, despite a collapse in global demand and shrinking physical markets, Russia and OPEC have engaged in a price war to try and maintain market share and market relevance. Oil markets are now heading into a period of a severe supply-demand imbalance in second-quarter 2020. In line with our economic outlook (see "Economic Research: COVID-19 Macroeconomic Update: The Global Recession Is Here And Now," published March 17, 2020), we anticipate a recovery in both GDP and oil demand through the second half of 2020 and into 2021 as the most severe impacts from the coronavirus outbreak moderate.
The combination of lower oil prices and slower world economic growth will weaken Colombia's external profile compared with our previous expectations. Colombia's external liquidity depends less on oil and oil-related exports than in the past--during 2019 they accounted for 23% of current account receipts (CARs) compared with 42% in 2014, before the last oil price shock. Nevertheless, we expect oil export earnings to decline in 2020, contributing to a current account deficit (CAD) rising toward 5.6% of GDP, from 4.4% last year. Thanks in part to likely weak growth in non-oil exports, we expect an only gradual recovery in CARs. That, along with lower profit repatriation and the impact of a weaker exchange rate, will likely reduce the CAD to an average of 4% of GDP during 2021-2023.
Lower exports will worsen Colombia's narrow net external debt toward 140% of CARs in 2020 from 113% in 2019, and likely keep it above 120% during 2021-2023. We expect that our measure of external liquidity, gross external financing needs compared with CARs plus usable foreign exchange reserves, will remain at 100%. The deterioration of Colombia's external profile reduces its capacity to absorb additional external shocks, such as a prolonged global economic slowdown or further tightening in external financing conditions.
We expect GDP growth to be around 0.7% in 2020 (compared with a previous expectation of 3.2%), likely picking up to 3.4% on average during 2021-2023 (higher than in most major Latin American economies).
A timely and adequate policy response by Colombian authorities could facilitate a macroeconomic adjustment to limit the negative impact of the external shocks. The combination of a floating exchange rate and inflation-targeting monetary policy should partially mitigate the negative effect of the economic shocks. Colombia's central bank has recently broadened its monetary policy tools to provide added liquidity and hedging instruments to better support banks and other financial institutions.
Thanks partly to fiscal reforms, the government's dependence on oil-related revenues fell below 10% of total revenues in 2019, compared with over 20% in 2014. That said, we believe that recent negative developments will reverse earlier fiscal consolidation due to additional spending pressures and revenue shortfalls. In fact, on March 17, the president announced a "state of economic emergency" and a set of measures in response to the pandemic and economic downturn, including more funding for the health system, tax measures, cash transfers to the poorest percentiles of Colombia's population, as well as government guarantees to private firms to meet payroll payments. We expect the government to draw upon available assets to fund these measures. As a result, we expect the change in net general government debt at an average of 3.5% of GDP during 2020-2023. (This ratio also captures the impact of below-the-line spending and depreciation of the Colombian peso on the sovereign's debt burden.) We expect that net general government debt will approach 47% of GDP by 2023 and interest payments to account for around 11% of total revenues.
Our ratings on Colombia reflect its track record of prudent macroeconomic management, and monetary and exchange-rate flexibility, which mitigate external shocks. They also reflect a moderate debt burden and weak external profile, which includes vulnerability to sudden changes in its terms of trade. However, Colombia has a flexible credit line of around $11.4 billion from the International Monetary Fund, supporting its external liquidity.

Key Statistics

Table 1

Colombia--Selected Indicators
20132014201520162017201820192020e2021f2022f2023f
Economic indicators (%)
Nominal GDP (bil. LC)713,626.71762,903.00804,692.00863,782.00920,194.00978,477.061,062,342.501,108,290.931,187,218.981,261,844.001,341,159.37
Nominal GDP (bil. $)381.87381.11293.48282.72311.80330.97313.19295.54310.38332.06352.94
GDP per capita (000s $)8.38.26.25.96.56.86.45.96.26.56.9
Real GDP growth4.64.73.02.11.42.53.30.73.83.23.2
Real GDP per capita growth3.43.51.80.90.11.42.2(0.4)2.62.02.0
Real investment growth6.111.8(1.2)(0.2)(3.2)2.14.3(1.5)4.53.53.5
Investment/GDP22.524.023.823.221.621.522.321.522.022.322.7
Savings/GDP19.218.817.418.918.317.517.915.817.618.218.7
Exports/GDP18.116.615.714.715.116.015.915.615.715.916.0
Real exports growth4.7(0.3)1.7(0.2)2.60.93.1(1.2)4.74.04.0
Unemployment rate9.69.18.99.29.49.710.610.79.69.49.3
External indicators (%)
Current account balance/GDP(3.3)(5.2)(6.3)(4.3)(3.3)(3.9)(4.4)(5.6)(4.4)(4.1)(4)
Current account balance/CARs(16.2)(26.8)(32.7)(22.5)(16.7)(19.0)(20.0)(27.7)(20.1)(19.6)(19.5)
CARs/GDP20.119.419.318.919.620.822.020.321.621.120.5
Trade balance/GDP0.8(1.2)(4.6)(3.2)(1.4)(1.6)(2.7)(3.9)(2.8)(2.7)(2.8)
Net FDI/GDP2.23.22.63.33.31.93.63.93.93.83.8
Net portfolio equity inflow/GDP0.50.50.2(0.1)0.2(0.2)(0.4)0.50.50.20.4
Gross external financing needs/CARs plus usable reserves92.698.295.788.894.097.8100.2100.8100.599.8101.1
Narrow net external debt/CARs50.666.297.6123.8117.5113.5113.8137.3126.5125.1124.9
Narrow net external debt/CAPs43.552.273.5101.0100.795.494.9107.5105.3104.6104.6
Net external liabilities/CARs133.8153.5211.8253.4242.6225.0246.7296.1274.2271.8273.5
Net external liabilities/CAPs115.1121.0159.6206.9207.8189.1205.6231.8228.3227.2228.9
Short-term external debt by remaining maturity/CARs20.928.842.043.148.345.949.961.755.451.651.6
Usable reserves/CAPs (months)5.05.57.58.57.86.96.98.37.57.26.9
Usable reserves (mil. $)43,15846,80746,22346,17447,13347,88852,65050,09850,09850,05350,053
Fiscal indicators (general government; %)
Balance/GDP(0.8)(1.5)(3.0)(2.8)(2.3)(2.0)(1.6)(2.8)(3.0)(3.2)(3.3)
Change in net debt/GDP3.24.16.72.73.65.75.65.02.83.13.2
Primary balance/GDP1.40.5(0.4)0.10.60.81.30.30.0(0.1)(0.3)
Revenue/GDP25.325.423.922.423.425.326.426.025.825.725.5
Expenditures/GDP26.127.026.925.225.727.328.028.928.928.828.8
Interest/revenues8.78.010.713.112.411.111.111.911.811.912.0
Debt/GDP35.738.843.744.645.648.450.353.552.652.552.5
Debt/revenues141.0152.7183.1199.0195.3191.3190.6205.4203.4204.4206.3
Net debt/GDP29.431.636.736.838.241.643.947.046.646.947.4
Liquid assets/GDP6.37.27.17.77.46.96.56.55.95.55.1
Monetary indicators (%)
CPI growth2.02.95.07.54.33.23.53.63.23.03.0
GDP deflator growth2.52.12.45.15.13.75.13.63.23.03.0
Exchange rate, year-end (LC/$)1,926.832,392.463,149.473,000.712,971.633,250.003,277.003,850.003,800.003,800.003,800.00
Banks' claims on resident non-gov't sector growth11.614.817.68.911.83.18.08.48.58.58.5
Banks' claims on resident non-gov't sector/GDP41.444.449.550.352.851.150.952.953.554.655.8
Sources: None.
Adjustments: None.
Definitions: Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private-sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. N/A--Not applicable. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. e--Estimate. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2


Colombia Ratings Score Snapshot
Key rating factorsScoreExplanation
Institutional assessment3Stable democracy with continuity in economic policies across party lines. Policy implementation is strong. Our base case assumes policy pragmatism, backed by a professional and technical trained civil service, and ample checks and balances, including an active judiciary.
Economic assessment4Based on GDP per capita ($) as per Selected Indicators in Table 1.
External assessment6Based on narrow net external debt and gross external financing needs as per Selected Indicators in Table 1.
The country is exposed to significant volatility in terms of trade due to its dependence on hydrocarbons.
Fiscal assessment: flexibility and performance3Based on the change in net general government debt (% of GDP) as per Selected Indicators in Table 1.
Fiscal assessment: debt burden4Based on net general government debt (% of GDP) and general government interest expenditures (% of general government revenues) as per Selected Indicators in Table 1.
Monetary assessment3Colombia has a floating exchange-rate regime, but its currency is not actively traded.
The central bank has a track record of independence and uses market-based monetary instruments. It has the ability to act as a lender of last resort for the financial system.
Indicative ratingbb+As per Table 1 of "Sovereign Rating Methodology."
Notches of supplemental adjustments and flexibility1We expect relatively large and growing private pension funds' external assets to provide additional external flexibility. Lastly, Colombia is one of few countries that has a flexible credit line from the IMF that would improve external liquidity under a stress scenario.
Final rating
Foreign currencyBBB-
Notches of uplift1Reflecting an independent monetary policy with a track record of floating currency. The sovereign has an relatively adequate capital markets, as demonstrated by local currency fixed income and money market accounting for about 30% of GDP.
Local currencyBBB
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec. 18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.
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