Ratings Services said today that it raised its long-term foreign currency sovereign credit rating on the Republic of Colombia to 'BB+' from 'BB'. At the same time, Standard & Poor's raised its long-term local currency sovereign credit rating on Colombia to 'BBB+' from 'BBB'. Standard & Poor's also raised its short-term local currency rating on the republic to 'A-2' from 'A-3'. The outlooks on the long-term ratings were revised to stable from positive.
"The upgrade is supported by Colombia's significantly improved growth prospects and fiscal performance," said Standard & Poor's credit analyst Richard Francis. "Colombia has enjoyed robust economic growth while boosting tax receipts and administering a better tax administration, which mitigates significant spending pressure stemming from military build-up, increased pension outlays, and an expensive ongoing intergovernmental transfers system," he added.
Mr. Francis explained that, as a result of this positive trend, the general government deficit fell to an estimated 1.3% in 2006 from 1.8% in 2005 and is expected to further improve to 1.2% in 2007. The better growth trajectory stems largely from the sharp rise in investment registered over the past five years. Investment to GDP is expected to exceed 27% by year-end 2007, a ratio similar to that of the Republic of Chile as well as some Southeast Asian countries such as the Kingdom of Thailand.
Lower debt and reduced external vulnerabilities also support the upgrade. "Net general government debt to GDP is expected to gradually fall to 31% of GDP by year-end 2007, slightly below the 35% BB median, from 35% in 2006," Mr. Francis said. "The relative debt burden is forecast to continue to fall in light of the strong economy and a rise in privatization receipts. In fact, the government has announced its intent to engage in a still-to-be-determined amount of debt buybacks in 2007," he continued.
Standard & Poor's said that Colombia's external indicators continue to improve because of a substantial increase in exports and remittances, which have boosted current account receipts, as well as continued prepayment of public sector external debt. However, despite these improvements, the government's underlying fiscal position remains inflexible because of large, constitutionally mandated transfers to local governments, large underfunded public pension systems, and the heavy interest burden (nearly 14% of revenue). Successful reform of the intergovernmental transfers law will be important to allay spending pressures beyond 2008; prospects for solid reform were reduced when Congress amended the proposal put forward by the administration.
"Further tax and pension reform leading to a more rapid improvement in the government's fiscal prospects and a lighter debt burden would contribute to higher creditworthiness," noted Mr. Francis. On the other hand, significant fiscal slippage or a sharp deterioration in national security could result in downward pressure on ratings," he concluded.
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