Moody's revises Colombia's sovereign credit outlook to negative

Moody's revises Colombia's sovereign credit outlook to negative

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Moody's Investors Service said on Thursday it lowered its sovereign foreign currency credit rating outlook for Colombia to negative from stable citing the unfavorable economic conditions created by the COVID-19 pandemic.

"The outlook change to negative reflects risks that the economic and fiscal effects of the coronavirus shock, which Moody's identifies as a social risk under its ESG framework, may leave a lasting impact on Colombia's fiscal strength and its overall credit profile," the firm said in a statement.

Colombia's investment grade credit rating of Baa2 was affirmed, Moody's said.

"Following a sharp deterioration in debt metrics in 2020, Moody's expects that fiscal adjustment will start in earnest in 2022 with results contingent upon a tax reform that will be discussed in 2021. In the absence of material fiscal consolidation, government debt metrics are unlikely to significantly improve over the medium term, resulting in a weaker fiscal profile than that of Baa2-rated peers," the statement said.

Moody's expects Colombia's economy to contract by 7.2% this year with a fiscal deficit of nearly 9% of gross domestic product as a result of extra spending on areas such as healthcare to fight the pandemic. As a result the general government debt-to-GDP ratio is expected to rise by 15 percentage points to 67%, which is above its Baa median credit rating of 61% of GDP.

"The trajectory for Colombia's debt metrics will be contingent on how successful government efforts are in delivering a thorough fiscal adjustment program over the coming years," Moody's said, adding: "The extent to which a tax reform proves effective in raising revenue on a permanent basis will be a major factor influencing Colombia's fiscal prospects and its credit outlook."

Colombia also faces the political uncertainty related to 2022 elections, which could prove challenging for achieving progress on boosting revenues and addressing spending rigidities, Moody's said.