Colombia’s fiscal deficit is rapidly worsening, raising concerns about a credit rating downgrade. The government’s expenditure expansion has not kept pace with the increase in revenue, leading to forecasts that the national credit rating may be downgraded for a second time after 2021.
According to Bloomberg News on the 30th (local time), projections are indicating that Colombia’s fiscal deficit will exceed 7% of its gross domestic product (GDP) this year. The financial corporation Credicorp Capital predicted the deficit size at 7.2% of GDP, while local financial corporation Alianza Valores and Brazil’s BTG Pactual estimated it at 7.1% and 7%, respectively. This is a level significantly higher than the government’s target (5.1%) and represents the largest deficit margin in recent years, excluding the COVID-19 pandemic.
Until before 2020, Colombia’s fiscal deficit was maintained at around 3% of GDP, but it has steadily increased, recording 6.8% last year.
The widening fiscal deficit is leading to rising Government Bonds yields. As of the 29th, Colombia’s 10-year Government Bonds yield recorded around 12%, showing a continuous upward trend since mid-September of last year. Luis Fernando Mejía, director of Fedesarrollo, noted, “The country’s fiscal capacity is rapidly weakening, increasing vulnerability to external shocks.”
The International Monetary Fund (IMF) has also warned about the increase in Colombia’s public debt and the expansion of budget deficits. In April, the IMF suspended a $8.1 billion Flexible Credit Line due to the deteriorating fiscal situation, noting it would resume once regular evaluations of the economic situation and mid-term checks on fiscal soundness were completed. This reflects the international community’s concerns about Colombia’s fiscal credibility.
The government is expected to announce a Medium-Term Fiscal Plan (MTFP) next month, but it is projected to be challenging to regain market confidence. The government has previously presented overly optimistic revenue forecasts, and the decline in international oil prices following tariffs imposed by the Trump administration has also undermined the credibility of the fiscal scenarios based on high oil prices.
Finance Minister Herman Avila recently acknowledged during a congressional hearing, “The revenue forecasts were overly optimistic, and oil revenue, which is the state’s main export item, is falling short of expectations.”
In this situation, there are warnings that Colombia’s national credit rating may soon be downgraded. Moody’s currently maintains Colombia’s rating at investment grade ‘Baa2’, but Standard & Poor’s (S&P) and Fitch have already downgraded the country to junk status in 2021.
Daniel Velandia, chief economist at Credicorp, stated, “There is a high possibility that at least one of the major credit rating agencies will lower Colombia’s credit rating further within the next few months.”
However, there are also some positive forecasts. Due to high interest rates, the long-term yields on Colombia’s Government Bonds have increased, suggesting that they are currently undervalued. Especially, if a pro-market government is established following next year’s general and presidential elections, there are analyses suggesting that fiscal normalization could be achieved quickly.