Colombia could lose investment grade in the next 18 months
The Ministry of Finance has said on several occasions that next year a tax reform will be presented that will try to increase the Nation’s income by 2% of GDP to reduce debt and stabilize accounts from the country.
However, the fact that 2021 is a pre-election year makes the reform process in Congress tortuous.
“The debate will be complex given current conditions and considering that 2021 is a pre-election year. Therefore, we do not rule out that, in the end, the Government decides to adopt a more gradual approach to increase revenues,” said Credicorp.
Although the risk rating agencies Fitch Ratings and S&P Global Ratings maintained Colombia’s note a few weeks ago, both (added to Moody’s) warned that Colombia needs to stabilize its fiscal accounts and reduce debt to maintain investment grade in the future.
If Congress ends up passing a non-structural tax reform, it would put Colombia’s investment grade future at stake.
“Due to the challenging scenario, we continue to consider that the probability that Colombia will lose investment grade in the next 12-18 months is high,” said Credicorp.
According to the firm, if Colombia loses investment grade, the short-term impact on local markets would be moderate, as the event would already be partially incorporated into assets.
Credicorp maintained the projection that Colombia’s GDP will fall 7% in 2020 and that it will increase 4.8% in 2021.
“The main risks for the activity are the uncertainty about the evolution of the pandemic, the shock to the business sector and the labor market, the lagged effect of low oil prices and the limitations to implement a broad program of fiscal spending”, Credicorp said.
In terms of inflation, the firm expects the indicator to end 2020 at 1.7%, a figure that would be outside the range of the Banco de la República, which is 2% to 4%. For 2021, the estimate is that inflation will approach the Colombian Issuer’s goal of 3% and end at 2.5%.
Despite the low inflation, Credicorp believes that Banco de la República will keep its monetary policy rate stable at the minimum of 1.75% for “a considerable time.” However, he warned that if economic activity performs worse than expected, there may be room for further cuts.