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Colombia Must Avoid Complacency

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Colombia needs to push further reforms and avoid complacency after regaining investment grade from one of the ratings agencies.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

Standard & Poor's on March 16 raised its credit ratings for Colombia to investment grade saying the economy had grown more resilient to external shocks and that Colombia's economic policies have contributed to growth and investor confidence. Do you agree with S&P's classification of Colombia as investment grade? While most would agree that an investment grade rating is good news, what risks or downsides might emerge for Colombia in the near- to mid-term? How might the change in rating influence decisions that government officials and business investors are considering for Colombia?  

Andrés Escobar, president and partner of EConcept AEI in Bogotá: It was about time Colombia got investment grade status back. S&P was right in pointing out the resilience of the economy to external shocks, which is another way of saying that in relative terms Colombia looks much better than before the Great Recession. As a society, we are not out of the woods yet, taking into account the domestic security situation and the high levels of unemployment and income inequality; also, fiscal contingencies need to be addressed. Nevertheless, few can dispute the fact that we have done our homework much better than many other countries. Colombian risk was already trading at investment grade levels before S&P's decision, and even though their move puts an end to a 12-year waiting period, the full effects of having investment grade status will not be felt until the other rating agencies follow suit in the upcoming months. When that happens, capital flows are bound to increase, as has been the case elsewhere in Latin America when investment grade status has been granted. Unintended consequences might result from this new situation. Getting investment grade back had become an end in itself, a reason to push structural reforms in Congress. Now that this landmark decision lies in the past, the appetite for much-needed aggressive reforms might subside. Also, monetary and fiscal authorities must remain vigilant of the additional pressure this new situation might imply in terms of currency appreciation. The heightened visibility of Colombia in the international scene can become a double-edged sword if the peso strengthens too much.

Fernando Losada, director of emerging markets research at Deutsche Bank in New York: S&P's upgrade was expected and justified. The country has made dramatic progress on the security front since the middle of last decade, which unlocked substantial flows of both domestic and foreign investment that increased production capacity and kept inflation in check. The main remaining economic and political challenges are related to the additional fiscal tightening needed to ensure future growth under conditions of macroeconomic equilibrium and the completion of the pacification process, which will require the final military victory over the guerrilla forces and the restitution of occupied land to its original owners. From the investor standpoint, the upgrade validates the enthusiasm about the Colombian economy that has been evident over the past few years. Colombian officials must continue making progress on the reform and fiscal consolidation fronts in order to obtain the coveted investment grade status from the other two large rating agencies. The agencies' recognition of Colombia's improving credit quality should also help make a stronger case for the approval of the bilateral free trade agreement on the part of U.S. Congress.

Alberto J. Bernal, head of research at Bulltick Capital Markets in Miami: I agree with the view of Standard & Poor's. If anything, I consider that the decision came a couple of quarters late. Market prices of Colombian trading assets had been forecasting such a move for quite some time. The recuperation of the investment grade rating is remarkable. Colombia was almost a 'failed state' in 2001, and by 2010, according to my statistical models, the potential rate of growth of the country had increased to 5.5 percent. This means that Colombia can now double its real GDP every 14 years, and not every 35 years, as was the case in the early 2000s. The reason behind this change is simple. Colombia went from investing 12 percent of its GDP in the early 2000s to investing 28 percent by the end of 2010. This rate of investment is materially higher compared to peer countries such as Brazil (Brazil's investment/GDP rate is 18 percent at this time). The risk for Colombia now is complacency. Achieving investment grade is an important development, yet Colombia now needs to work to become an A-rated country. More productivity enhancing reforms and better use of fiscal resources are needed to continue advancing in the development road. I'm sure that President Santos and his team understand that.

Jorge Lara Urbaneja, international business consultant based in Bogotá: Standard & Poor's, Moody's and Fitch (Duff & Phelps) gave investment grade to Colombia (BBB-) 11 years ago. Thereafter, the three agencies downgraded Colombia on doubts about Colombia's financial stability. Those fears never materialized. Colombia continued paying its obligations and its debt instruments never really lost value. Colombia has never defaulted or restructured its debts. Colombia's debt rating, which S&P raised to BBB-, permits international institutional investors, such as pension funds, to invest in Colombian debt securities. At present, Colombia's budget deficit does not exceed the 4 percent GNP figures. To assure this performance, the government enacted statutory controls such as the Fiscal Rule (Regla Fiscal) and new provisions on royalty distribution to the regions. It is also providing new resources to the budget by selling an additional 10 percent of Ecopetrol's stock. Now, in view of S&P's credit rating increase, Finance Minister Echeverry is again considering international bond placements. On the revenue side, first quarter figures show tax collections exceeding estimations by 1 billion pesos. Good news, considering such open-ended items to account for, as internal security and subversion actions associated with drug traffic, at a time when the U.S. is gradually eliminating aid from Plan Colombia. From another angle, a more stable financial outlook for the country should allow the government to adopt the anticipated structural tax reform that should mainly eliminate taxes that have negative long-term effects, like the 0.4 percent on financial transactions and the net worth tax. Adjusting the Colombian tax system to international standards would be a major improvement in the country's international competitiveness.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter. 

 

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