Fitch Upgrades Colombia to Investment Grade; LTFC IDR to 'BBB-'

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The Rating Outlook is revised to Stable from Positive.

Colombia's upgrade to investment grade is supported by its track record of prudent economic policies, demonstrated resilience to external and domestic shocks, as well as the improvement in its external credit metrics. Moreover, the administration of President Juan Manuel Santos has moved forward an extensive reform agenda to bolster the credibility and predictability of public finances and enhance the country's growth trajectory.

'Increased macroeconomic policy credibility, a flexible exchange rate regime, strengthened external liquidity position and moderate external debt have steadily improved the economy's capacity to absorb external shocks,' said Erich Arispe, Director in Fitch's Sovereign Group.

Colombia's five-year average growth is expected to equal 4.2% in 2011, above the 3.1% of the 'BBB' median. The new government's pro-growth strategy provides upside risk to growth over the forecast period. Colombia is also likely to maintain broad macroeconomic stability with inflation slightly above 3% in 2011 and 2012.

Colombia's general government deficit at nearly 3% of GDP in 2010 was higher than peers and is likely to decline gradually over the forecast period due to high expenditure rigidity and sustained spending pressures. Moreover, Colombia's revenue base remains relatively low compared with investment grade peers. However, Fitch considers that the present administration has worked to develop its fiscal responsibility credentials during its first year in office by implementing revenue-enhancing measures and outperforming its 2010 fiscal targets in spite of the Winter Emergency. 

More importantly, Colombia's Congress has recently approved three key pieces of legislation. The Fiscal Sustainability Reform provides the government with the legal tools to manage expenditure pressures, while the Fiscal Rule and Reform to the Royalty System could prove to be useful mechanisms both to increase the counter-cyclical capacity of the general government as well as provide a credible path toward fiscal consolidation.

'While Colombia's general government debt, at 42% of GDP, remains above rating peers, its favorable currency composition, a manageable amortization profile and the sovereign's impeccable debt repayment record mitigate this credit weakness,' added Arispe. In addition, continued growth and fiscal consolidation could result in lower debt levels in comparison with the 'BBB' median over the forecast period.

The country's external debt, at 22.5% of GDP, is lower than peers, and Colombia's external liquidity, at 194%, is stronger than the 134% 'BBB' median. The sovereign remains a net external debtor in contrast to the net creditor position of the 'BBB' median. This balance sheet weakness is partly mitigated by the manageable sovereign external debt amortization profile and strong external liquidity position. Moreover, Colombia's access to the IMF's Flexible Credit Facility (FCL) further reduces its vulnerabilities to external shocks.

A favorable growth trajectory, further strengthening of the external balance sheet, as well as successful implementation of the recently passed fiscal reforms that deliver fiscal consolidation and debt reduction would be viewed positively. While not Fitch's base case, persistent fiscal deterioration leading to negative debt dynamics would be negative for the ratings.

Fitch Ratings.