Fitch Ratings predicts that Colombia’s economy will grow by 1.5% in 2024. This growth rate, while avoiding a severe economic contraction, lacks the strength to upgrade the country’s credit rating anytime soon.
Richard Francis, Fitch’s lead analyst for Colombia’s sovereign ratings, shared this insight recently. Francis explained that an improvement in rating requires more substantial wealth generation and better debt management.
This concern worries financial experts because a poor rating creates additional financial pressure. The concept of Ricardian equivalence comes into play: today’s debt becomes tomorrow’s tax.
Colombia’s economic expansion has averaged 4% in recent years. However, forecasts for this year show an increase of 1.5%, with an expected increase to 2.8% in 2025.
Francis noted that growth below 2% could negatively affect the country’s credit rating. Key economic indicators have faced challenges. Private investment saw a decline of up to 33.5% in 2023.
Experts point out that this investment serves as fuel in the future for production machines. 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 noted 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 impact of the recently approved pension reform on public finances. The government estimates this impact at 0.3% of GDP, which Frančesku stressed is significant given the current deficit.
Regarding the national budget, Francis warned that the increase in spending without new income would lead to a bigger 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 desirable for the environment, it is impractical for a deficit country. Ríos concluded by emphasizing the importance of fiscal discipline. Relaxing the cap on this rule, given spending pressures, could worsen Colombia’s credit rating.
