Investment Grade Ratification: good news or a warning to Petro’s economic policy?

June 30, 2023

Moody’s upholding of the Investment Grade rating sends a message to the government warning about the importance of continuing the economic policy based on the guidelines of international financial organizations.

Moody´s, credit rating agencies, Más Colombia

Colombia has a public and private external debt of almost 200 billion dollars, an astronomical figure whose interest depends to a great extent on the Investment Grade granted to the country by the credit rating agencies. The awarding of new international loans also depends on this.

With the pandemic, Colombia lost its Investment Grade, and has made efforts to recover and hopefully improve it. Moody’s recent statements seem to indicate that what is to come will depend to a great extent on the outcome of the economic policy and reforms led by the government, which have suffered hard stumbles in the Congress of the Republic.

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The evaluation of credit rating agencies

Between May and July 2021, the credit rating agencies, Standard & Poor’s and Fitch, downgraded Colombia’s rating to what is called the loss of Investment Grade. This means that according to these rating agencies, Colombia decreased its credibility in terms of its capacity to pay its debts.

The loss of the Investment Grade rating causes foreign lenders to charge Colombia higher interest rates for the money they lend, as they increase the likelihood that the country will default on its debts and doubt the stability of the economic policy.

This, in turn, increases the amount of debt to be paid and, consequently, also the amount of money to be allocated for this purpose in the national budget.

To make their evaluation, the credit rating agencies take into account the outlook for the economy, inflation, the stability of economic policy, the unemployment rate, the fiscal deficit and the current account. According to Banco de la Republica, Colombia’s external debt in February 2023 was US$187,772 million, equivalent to 54.5% of GDP.

The ratio to GDP is much lower in the case of Colombia than in countries such as Spain, where it is 113.20%; the United Kingdom (102.64) and the United States (126.43), among many others.

On the other hand, it is important to note that Colombia is not the only country that lost its Investment Grade in recent years. During the pandemic, Argentina, Venezuela and Ecuador also lost it.

Investment grade: a new evaluation

In September 2022, José Antonio Ocampo, in his capacity as Minister of Finance, visited credit rating agencies in the United States to inform them about the stability of the government’s economic policy and reported a very positive reception.

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Following Ocampo’s departure from the ministry, international markets increased their uncertainty, but the storm clouds seemed to calm down after Moody’s Investors Service maintained Colombia’s Investment Grade and stable outlook in June of this year.

However, the message sent by the rating agency may be troubling for the government, since what it is looking favorably upon is that the reforms that the government has proposed have been moderated with the system of “checks and balances, supporting the quality of the institutions and the governance of the country”.

Moody’s added that “during the first year of Gustavo Petro’s administration, institutional checks and balances have prevented a major deviation from traditionally prudent policy management in the country, allowing only moderate changes in the country’s policy framework”.

Warnings to the government

As a push for President Petro to maintain the political alliances with the traditional parties that gave rise to his governing coalition, Moody’s indicated that a shift in political alliances in Congress may prompt President Petro to revise the health, pension and labor bills to build political consensus. “In doing so, the resulting policies are likely to be conducive to preserving macroeconomic and fiscal stability,” stated.

Likewise, the agency pointed out that the deficit generated by the fuel subsidy (with the Fuel Price Stabilization Fund) is an outstanding fiscal challenge, and called on the Government to follow a set of policies to reduce it gradually.

Finally, Moody’s Investors Service made a veiled invitation to maintain the trend of increasing the interest rate to control inflation, stating that “in the context of the inflationary shock, the central bank continues to operate as an autonomous entity that sets monetary policy objectives in line with its inflation targeting mandate”.