By NEWS RELEASE
R&I Affirms BBB-, Stable: Republic of ColombiaRating and Investment Information, Inc. (R&I) has announced the following:
ISSUER: Republic of Colombia Foreign Currency Issuer Rating: BBB-, Affirmed Rating Outlook: Stable
Jan 17, 2014
Colombia has historically exhibited remarkable economic stability, and the economy is growing steadily through investment spurred by improved public security in recent years. With a solid recovery in oil production, which plummeted temporarily owing to intensified guerrilla activity, the reform of the country's royalty distribution scheme is expected to reduce regional disparities and help stabilize society. Current account deficits have been widening somewhat, but financed consistently through foreign direct
investment (FDI) and other sources. Given low external debt, concern over external liquidity is also small.
Considering these factors, R&I has affirmed the Foreign Currency Issuer Rating at BBB-. Although the Rating Outlook is Stable, a rating upgrade would be possible in the near future if economic fundamentals are set to be strengthened, supported by macroeconomic stability.
The market forecasts sustained 4-5% growth in real gross domestic product (GDP) for 2014 and 2015 in the normal course of events. Since the early 2000's, public security has improved remarkably, notably in cities, and investment activities have shown a firm recovery mainly in the oil and coal sectors, resulting in an investment to GDP ratio of a record high 28.6% in 2Q 2013. An increase in production capacity has mitigated excessive inflationary pressure, and the economy is driven by consumption and investment in a well-balanced manner. By taking advantage of such macroeconomic stability, the government should continue to implement policies for achieving microeconomic improvement, including reducing unemployment that is high compared to other Latin American nations and lowering an elevated informal employment level, just as it reduced hiring costs at companies through a recent tax reform. Moreover, upgrading transportation infrastructure, an ongoing project led by the government, is an imperative to enhance economic productivity.
Fiscal management is prudent, and despite several debt crises in Latin America, the Colombian government has never defaulted on its debt. R&I recognizes the government's strong commitment to maintaining fiscal discipline, as evidenced by the fiscal management rules applied to the central government and other institutional frameworks. The government has set out a plan to gradually turn the fiscal balance of the non-financial public sector (SPNF) into surplus by 2020, as the SPNF's fiscal deficit widened to 3.1% of GDP in 2010. In 2013, the SPNF fiscal balance was in a deficit of 1.0% of GDP. The outstanding gross debt to GDP ratio of the central government and the SPNF was 34.6% and 40.6%, respectively, according to the government's announcement. In its 2013 medium-term fiscal framework, the government expects net debt to GDP to decrease to 25.3% and 5.9% for the central government and the SPNF, respectively, towards 2024.
The International Monetary Fund (IMF) estimates that Colombia's public sector receives oil-related revenue amounting to around 3.0-4.0% of GDP annually, which will likely continue to grow in tandem with an increase in oil production. As part of the comprehensive reform of the oil royalties regime in 2011, the government established a "Saving and Stabilization Fund", a scheme in which 20% of the total royalties received are set aside and managed by the central bank to offset possible revenue losses stemming from reduced oil production and repay debt in the future. R&I favorably views the reform as it enables more stable fiscal management by mitigating oil revenue volatility.
The country's current account balance is chronically in deficit. Income payments to non-residents are
the largest component of the deficit, reflecting the fact that FDI inflows are principally used to finance the deficit. With intermediate and capital goods imports financed primarily through FDI, the structure of
