Fitch Pushes Colombia Further Into Junk Citing Fiscal Deficits
TL;DR
Fitch downgrades Colombia's credit rating to BB due to large fiscal deficits and doubts about post-election fiscal consolidation. The government faces budget constraints after tax bill rejection, with some debt improvements noted.
Key Takeaways
- •Fitch downgraded Colombia's credit rating to BB, citing persistent budget deficits and challenges in fiscal consolidation after the 2026 election.
- •Colombia's primary deficit is projected to reach 2.9% of GDP by 2025, with high debt levels and suspended fiscal rules contributing to fiscal deterioration.
- •The government's tax bill was rejected, limiting revenue options, while Petro's administration updated fiscal estimates showing a reduced deficit and debt-to-GDP ratio.
- •Market reaction to the downgrade is expected to be minimal, as it was anticipated and aligns with S&P's existing rating.
Tags
Fitch Ratings downgraded Colombia’s credit rating one notch deeper into junk territory, citing persistently large budget deficits that will add to the nation’s debt load.
The major credit-rating company classified Colombia’s sovereign issuer at its BB level, down from BB+, but with a stable outlook. In a statement, it cast doubt on whether a change in leadership following next year’s presidential election will improve the nation’s deteriorating fiscal outlook.
“Fitch expects the lack of a credible fiscal anchor, increased fiscal spending rigidities and potential political constraints in implementing revenue raising measures will challenge prospects for fiscal consolidation after the 2026 election, regardless of the outcome,” according to the statement.
Fitch estimates that primary spending will increase by 13% by the end of 2025, and take the primary deficit to 2.9% of GDP.
Colombia lost its investment-grade rating in 2021 following downgrades by Fitch and S&P. Since then, debt levels have remained high and a fiscal rule that restricted government spending was suspended. Last March, Fitch lowered its rating outlook for the South American nation to negative.
The latest downgrade is unsurprising, argues Andres Pardo, chief Latin America strategist at XP Investments. “This year’s primary deficit will be much larger and next year’s will be even higher,” he said. “The country’s debt path will move further away from the levels of countries with similar ratings. Without spending cuts or credible commitments, everything would continue to deteriorate.”
The government is facing deeper budget constraints after Congress rejected a tax bill that sought to raise 16 trillion pesos ($4.2 billion) in revenue for next year.
Read more: Colombian Lawmakers Block Tax Hikes, Clouding Fiscal Outlook
The administration of outgoing leftist President Gustavo Petro updated some of its macroeconomic estimates earlier on Tuesday, including for the fiscal deficit, which is now seen at 6.2% of GDP. The new estimate is 0.9 percentage points below what the government forecast earlier this year. The debt-to-GDP ratio is seen falling this year to 57.3%, or 4.1 percentage points less than originally estimated by the government, according to the finance ministry.
Read more: Colombia Gets Market Wake-Up Call With Elections in Focus
Seeking to reduce debt levels and borrowing costs, Petro’s government implemented a controversial debt strategy earlier this year that included aggressive buybacks and complex total return swap operation in Swiss francs. The strategy yielded some results as seen in the improved debt-to-GDP ratio.
Juan David Ballen, director of analysis and strategy at local brokerage Aval Casa de Bolsa, said he doesn’t expect a major market reaction from Tuesday’s downgrade.
“I would expect some volatility, but no more than that, since, first, it’s not a complete surprise and, second, S&P already had us at BB, so Fitch’s rating is the same.” he said.