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Moody’s, one of the three major credit rating agencies in the market, reaffirmed Colombia’s credit rating at Baa2, maintaining the investment grade, but changed the outlook to negative.
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.
The change in outlook, according to the rating agency, is due to the challenging macroeconomic conditions that the country is facing, “associated with weak economic growth, a sustained increase in the country’s borrowing costs that could deteriorate fiscal management and the country’s credit profile going forward.”
Read also: What is the investment grade in Colombia?
It is worth mentioning that in mid-June, the Ministry of Finance received a visit from the Moody’s agency, amid a stir over the country’s fiscal outlook (low tax collection and announced budget cuts). Between May and July 2021, Colombia lost this rating from the Fitch and Standard & Poor’s agencies and the great fear was that, given the fiscal problems facing the country, Moody’s would make a similar decision.
However, the rating agency highlights the country’s institutional framework as a positive aspect, “which translates into the correct functioning of checks and balances. It also highlights that the Central Bank continues to manage monetary policy independently.”
The rating agency also highlighted the ability that the National Government has demonstrated to make spending cuts in order to comply with the fiscal rule, and keep debt levels under control, in line with its peers.
As well as the efforts made by the Government to reduce the fiscal cost of fuel subsidies, through increases in gasoline prices and progressive decisions that impact the price of diesel.
“The rating agency has placed a vote of confidence in the country, highlighting the decisive decisions taken by President Petro’s government to cut spending in order to maintain fiscal and macroeconomic sustainability,” said Ricardo Bonilla, Minister of Finance and Public Credit.
What is investment grade?
Investment grade is simply a threshold in a grading table that determines a minimally acceptable grade, similar to the 3.0 that many universities use to determine who passes or fails a subject (even if only just). But in the world of global finance, this threshold determines which country has reasonable standards of economic and reputational solidity with its creditors. In other words, if it has investment grade, there is not as much risk and therefore it can be lent at attractive interest rates (the more steps above investment grade it is, the less interest it pays).
Because of the importance of these scores, the industry of risk rating agencies exists. These are entities that specialize in assessing the risk of each nation and assigning a rating to its debt based on the risk determined by different key factors (such as inflation, indebtedness, GDP, and the strength of institutions). Although there are many rating agencies, the most important ones, those that investors (creditors) look at the most, are Standard & Poor’s (S&P), Fitch Ratings and Moody’s.
It is also necessary to understand how credit ratings are read. They have two parts: a grade and an outlook. The first part is precisely the rating, 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). At Standard & Poor’s and Fitch Ratings, investment grade is obtained from a BBB- rating (the negative sign does not mean a negative outlook), and at Moody’s from Baa3. And of course there is a whole range of ratings both above and below these thresholds.
