Dagong Upgrades the Sovereign Credit Rating Outlook of the Republic of Colombia to Stable
Dagong Global Credit Rating Co., Ltd.
June 6, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided today to upgrade the outlook for the sovereign credit ratings of the Republic of Colombia (“Colombia”) to stable from negative, while maintaining its local and foreign currency sovereign credit ratings at BBB+. The signing and implementation of the peace agreement and infrastructure construction have contributed to the economic development of Colombia. Its structural tax reform is conducive to increasing the government’s revenue and reducing its fiscal deficit. The government’s debt structure is reasonable. The foreign exchange reserves guarantee the short-term external debt repayment. Therefore, the government’s solvency is stable in terms of both local and foreign currency.
The main reasons for upgrading the outlook for the sovereign credit ratings of Colombia are as follows:
1. The country's political situation is basically stable, and the situation surrounding security has improved. During Santos' presidency, the domestic political situation has been stable and policy continuity has been good. Striving for peace, promoting fairness and developing education are the three pillars of Santos’ governance. He actively promoted peace negotiations with the rebels and strengthened infrastructure construction so as to increase employment and promote economic growth. In 2016, the Colombian government signed a peace agreement with the “Revolutionary Armed Forces of Colombia”, which was approved by congress. The peace agreement is of great significance to safeguarding safety and security in Colombia, which not only ended the armed conflicts over the past fifty odd years and improved the country's social security situation, but also helped promote social integration and regional development.
2. Improvement in both domestic and foreign demands has jointly promoted short-term economic recovery. In the short term, the improvement of the country's situation surrounding security and large-scale infrastructure projects will help promote investment. Stabilizing commodity prices and an economic rebound in major trading partners such as the United States will enhance external demand. In 2017 and 2018, it is expected that Colombia’s economic growth rate will increase slightly to 2.3% and 2.6% respectively. In the medium to long term, despite the problems of poor infrastructure and polarization between rich and the poor, the country's rich mineral resource endowments will bestow economic growth with a certain potential. Coupled with the government's efforts to reduce trade barriers to promote non-traditional exports, it is expected that Colombia’s average economic growth rate will be 3.5% in the medium and long term.
3. The structural tax reform and fiscal consolidation policy will effectively increase government revenue and reduce fiscal deficit. In the short term, Columbia will cut its fiscal deficit by raising the value-added tax rate, unifying the corporate income tax rate, strengthening tax collection and management, reducing fiscal expenditure, and improving the efficiency of capital use. It is expected that the general government’s primary finances will be balanced in 2017 and achieve a fiscal surplus rate of 0.2% in 2018. In addition, domestic debt financing provides important support for government finances. The country's ten-year treasury yields fell from 8.657% at the beginning of 2016 to 6.301% at the end of May 2017. Financing costs have decreased significantly, and the government’s debt repayment sources will tend to improve.
4. The government’s debt burden decreased slowly, and its solvency will tend to be stable in the medium term. Thanks to the fiscal consolidation policy, the Colombian government’s debt has entered a declining channel since 2017. It is expected that the government debt burden rates will be 47.9% in 2017 and 47.8% in 2018 respectively, and decrease to 44.1% in 2021. Coupled with the fact that most of the government’s debt is long-term debt, the government's solvency in local currency remains stable. Colombia’s total external debt burden rate was 43.8% in 2016. Shortening the current account deficit would reduce foreign currency’s financing demand in the short term. Foreign exchange reserves are sufficient to cover the principals and the interests due at maturity, as well as the current-account deficit. The government’s solvency in foreign currency is stable.
There are three primary reasons for maintaining Colombia’s sovereign credit ratings: first, the anti-government armed forces’ activities apart from that of the "Revolutionary Armed Forces of Colombia" are still rampant. Drug trafficking and crimes are threatening the social and economic security, which will drag the economic structural reforms. Second, the banks’ loan to deposit ratio has hovered above 100% for years, reflecting the potential liquidity risks existing within the banking system. Third, the perennial cumulative deficit in current account significantly reveals the country's external vulnerability. Hence, Dagong has decided to maintain Colombia’s sovereign credit ratings at BBB+.