Colombia Faces Fourth Downgrade as April Ratings Season Opens — But $110 Oil Buys Time

A Colombia downgrade has been priced into bond markets for weeks. The question now is whether $110 oil buys enough time to push the decision past the May election — or whether the fiscal numbers are too broken for even a commodity windfall to mask.

Colombia’s fiscal trajectory is heading toward a fourth credit downgrade, according to multiple analysts who spoke to Bloomberg Línea this week. Independent economist Andrés Langebaek warned that “April and May are typically when agencies weigh in,” adding that “Colombia’s fiscal situation remains very ugly” and that a further Colombia downgrade is “very probable.” The country has already been cut by Fitch to BB (December 2025), by S&P to BB (June 2025), and saw its Moody’s outlook revised downward — a sequence that has pushed sovereign borrowing costs sharply higher and eliminated any near-term path back to investment grade.

The Oil Lifeline

The one variable working in Colombia’s favor is the commodity it has spent the Petro presidency trying to phase out. The 2026 financial plan was built on Brent at $59.20 per barrel. Crude now trades above $110 following the Strait of Hormuz crisis, generating a windfall that Bloomberg Línea estimates could significantly strengthen public finances if sustained. Oil royalties, Ecopetrol dividends, and petroleum-linked taxes all scale with price. At $110 Brent, the treasury collects materially more than at $59 — potentially enough to narrow the headline deficit without any spending cuts at all.

But this is exactly the pattern that Colombia’s fiscal watchdog has warned about. When oil prices rise, revenues look healthier — but the underlying structural balance may not improve at all. The adjusted primary deficit, which strips out commodity windfalls, stood at −3.5% of GDP in 2025, one of the worst readings in decades outside the pandemic. The Observatorio Fiscal at the Pontificia Universidad Javeriana concluded in March that the 2025 improvement was driven by “temporary factors” rather than any genuine fiscal adjustment.

Why Agencies Might Wait

Rating agencies have historically been reluctant to cut sovereign ratings in the middle of an election campaign, particularly when the outcome could produce a meaningful policy shift. Colombia votes May 31 in the first round, with a likely June runoff. If a center-right candidate wins and signals fiscal consolidation, the downgrade calculus changes. If continuity prevails without a credible spending plan, the cut becomes almost certain in the second half of 2026.

The Banco de Bogotá’s head of economic research, Camilo Pérez, framed the dynamic bluntly: even a “favorable” electoral outcome does not mean fiscal improvement, but merely “the break point between further deterioration and a slow multi-year recovery.” JPMorgan’s Colombia outlook projects the fiscal deficit at −6.6% of GDP in 2026 with gross financing needs reaching 11% of GDP — a level that sustains risk premiums and constrains any central bank easing.

The Structural Trap

The government’s updated financial plan targets reducing the deficit from 6.4% to 5.1% of GDP in 2026, a 1.3-point correction that Anif president José Ignacio López called “desirable but unclear.” Since 1906, Colombia has achieved an adjustment of that magnitude only five times. The plan relies on cutting primary spending by 1.7 points of GDP, but roughly 90% of the national budget is locked in by legal mandates in health, pensions, and territorial transfers. Without congressional action to unlock those rigidities, the math does not work.

Meanwhile, the emergency wealth tax on 15,000 companies imposed earlier this year has generated revenue but further damaged the investment climate. Business federation Andi warned that some sectors face effective tax burdens exceeding 80% when the wealth tax is stacked onto the 35% corporate rate plus extractive surcharges. And the BanRep rate hike to 11.25% — which Petro has attacked as an “electoral act” — adds another layer of fiscal drag by increasing the government’s own debt service costs.

What Investors Are Watching

The 2030 TES (government bond) yield curve has inverted, with bonds trading at 14.2% — a level that reflects deep skepticism about the fiscal path. COLCAP has shown surprising resilience, rising 0.86% on Monday in its first pricing of the BanRep constitutional crisis, but the equity market is being supported by the same oil windfall that cushions the treasury. If Brent retreats toward the government’s $59.20 assumption, both the market and the fiscal accounts would deteriorate simultaneously.

The next six weeks will determine whether the agencies move before the election or after. A Fitch or S&P review in April would land at the worst possible moment for market confidence. A May cut would coincide with the vote itself. And waiting until the second half gives the new government a narrow window to present a credible plan before the next round of reviews begins. For a country that held investment grade and an IMF safety net just 18 months ago, the distance fallen is remarkable — and the climb back, regardless of who wins in May, will take years.

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