Colombia’s Economic Growth Insufficient for Credit Rating Upgrade, Fitch Reports

Fitch Ratings predicts Colombia’s economy will grow by 1.5% in 2024. This growth rate, while avoiding a feared economic contraction, lacks the strength to improve the country’s credit rating soon.

Richard Francis, Fitch’s lead analyst for Colombia’s sovereign ratings, shared this insight recently. Francis explained that a rating upgrade requires more substantial wealth generation and better debt management.

This concern worries finance experts because a poor rating creates additional financial pressure. The concept of Ricardian equivalence comes into play: today’s debt becomes tomorrow’s taxes.

Colombia’s economic expansion has averaged 4% in recent years. However, projections for this year show a 1.5% growth, with an expected increase to 2.8% in 2025.

Francis noted that growth below 2% could negatively impact the country’s credit rating. Key economic indicators have faced challenges. Private investment saw declines of up to 33.5% in 2023.

Experts stress that this investment serves as future fuel for the productive machinery. Francis expects improvement starting next year and into 2026.

Inflation and Fiscal Challenges in Colombia

Inflation in Colombia remains a concern. It affects purchasing power and reduces consumption. Francis pointed out that Colombia’s inflation rate is higher than comparable Latin American neighbors.

Inflation expectations for the next 12 months remain above the central bank’s 3% target. The fiscal deficit is expected to reach 5.6% in 2024.

Francis commented on the recently approved pension reform’s impact on public finances. The government estimates this impact at 0.3% of GDP, which Francis emphasized is significant given the current deficit.

Regarding the national budget, Francis warned that increased spending without new revenue would lead to a larger deficit. This situation would become unsustainable in the medium term, a key point for Fitch’s analysis.

Alexánder Ríos, an analyst at Inverxia, added that the sovereign rating also depends on funding sources. He noted that the government has eroded confidence in fossil fuel investments.

While this may be environmentally desirable, it is impractical for a country with a deficit. Ríos concluded by stressing the importance of the fiscal rule. Relaxing this rule’s ceiling, given spending pressures, could worsen Colombia’s credit rating.