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This week, the Ministry of Finance received a visit from the Moody’s agency, one of the three large risk rating agencies in the market, in the midst of a scramble over the country’s fiscal outlook (low tax collection and announced budget cuts).
According to Ricardo Bonilla, Minister of Finance, Moody’s maintained the Baa2 rating, which implies that the country, at least before this agency, continues to be considered with the precious investment grade.
It is worth remembering that, between May and July 2021, Colombia lost this rating before the Fitch and Standard & Poor’s agencies and the great fear at this moment is that, given the fiscal problems facing the country, Moody’s will make a similar decision.
In Moody’s ranks, the investment grade has three rungs (so to speak) that from highest to lowest read like this: Baa1, Baa2 (the one the country currently has) and Baa3. If the country’s rating falls in this ranking, it could find itself in the area considered speculative non-investment grade.
To better understand this news, it is worth explaining a little what investment grade means.
What is investment grade?
The investment grade is simply a threshold in a grading table that determines a minimally acceptable grade, similar to the 3.0 that in many universities establishes who passes or fails a subject (even if it is just scraping). But in the world of global finance, that threshold determines which country has reasonable standards of economic and reputational solidity with its creditors. That is, if it is investment grade, there is not as much risk and therefore it can be lent with attractive interests (the more steps above the investment grade, the less interest you pay).
It is because of the importance of these scores that the risk rating industry exists. These are entities that specialize in assessing the risk of each nation, and assigning a grade to its debt based on the risk determined by different key factors (such as inflation, debt, GDP, and the strength of institutions). Although there are many rating agencies, the most important, the ones that investors (creditors) look at the most, are Standard & Poor’s (S&P), Fitch Ratings and Moody’s.
You also need to understand how credit scores are read. It has two parts: a note and a perspective. The first part is precisely the qualification, the score. And the outlook gives information on how the rating could change in the future (usually 12 months), so it can be positive (the rating could go up), stable (it would remain the same) or negative (there is a risk of a downgrade). In Standard & Poor’s and Fitch Ratings the investment grade is obtained from the BBB- rating (the negative sign does not mean negative outlook), and in Moody’s from Baa3. And of course there is a whole staircase of grades both above and below these thresholds.
Has the scare already passed for the country?
“Today Moody’s already reported that we are within investment grades,” Bonilla said in statements to the media this Wednesday.
And although this news is positive (and more than welcome), the fiscal scenario still presents a series of complications that are not minor.
For example, this Friday, the Government must present the Medium-Term Fiscal Framework: this document is usually key to understanding the vision and knowing the scope (the real one, not the rhetorical one) of the governments in power. But in this case it will be particularly important, since it must provide security and confidence to the market.
And, in addition to the Framework, it should soon be known in which specific sectors and lines a cut of $20 billion will be made in the General Budget of the Nation to try to cover the gap in resources that the country currently has.
Although the size of the cut is substantial (and is equivalent to the resources that were sought in the previous tax), several analyzes indicate that, by the end of the year, those $20 billion can become almost $50 billion so that the Government does not exceed the limits of deficits imposed by the fiscal rule (another instrument closely monitored by investors of all types).
