Fitch Upgrades Colombia to 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has upgraded Colombia's ratings as follows:

--Long-term foreign Issuer Default Rating (IDR) to 'BBB' from 'BBB-';

--Long-term local currency IDR to 'BBB+' from 'BBB';

--Senior unsecured foreign bonds to 'BBB' from 'BBB-';

--Short-term foreign currency IDR to 'F2' from 'F3'

--Country ceiling to 'BBB+' from 'BBB'.

Fitch has revised the Rating Outlook to Stable from Positive.

KEY RATING DRIVERS

The upgrade is underpinned by Colombia's improvement in its external accounts and positive government debt dynamics, which support the convergence of external and fiscal credit metrics with rating peers. In addition, the sovereign's credible and consistent policies provide it with the capacity to withstand external shocks; this was demonstrated during the recent increase in financial volatility witnessed by several emerging markets. Colombia's medium-term growth prospects remain favorable compared with several of its rating peers and should be supportive of fiscal performance.

Sustained accumulation of international reserves by the Colombian central bank has strengthened its external buffers, as the country's external liquidity ratio surpasses the BBB median. The sovereign has also turned into a net sovereign external creditor in 2013. Access to the International Monetary Fund's Flexible Credit Line (FCL) further buttresses Colombia's shock absorption capacity.

General government debt, at 37.1% of GDP, remains below peers and is likely to maintain a steady decline underpinned by moderate deficits and continued growth. Moreover, Colombia's low FC government debt, high proportion of fixed-rate instruments (94%) and a manageable amortization profile, reduce refinancing, interest and foreign exchange risks.

Despite the below-potential GDP growth, Colombia has managed to contain pressures on its fiscal accounts. Moreover, the current administration's reforms to strengthen public finances such as the fiscal sustainability law and the fiscal rule reduce the risk of fiscal policy slippage over the forecast period.

Growth remains below potential and could reach 3.8% in 2013. Nevertheless, Colombia's five-year average growth performance remains comfortably above BBB-rated sovereigns. Fitch expects growth to pick up over the forecast period in line with the recovery in external and domestic demand. The timely and efficient implementation of the country's infrastructure program could further lift growth performance and improve overall competitiveness.

Colombia's external financing needs (current account balance plus external amortizations as a percentage of international reserves) remain higher than the 'BBB' median. Although the country's current account deficit will likely widen to 3.4% in 2013 and remain above 3% over the next two year, net foreign direct investment (FDI) will remain as the main single source of external funding. Moreover, external debt burden is moderate when compared with peers.

Colombia lags investment grade peers in structural factors such as weaker governance, low GDP per capita and limited trade openness. Moreover, a narrow revenue base, a rigid expenditure profile and spending pressures constrain faster fiscal consolidation. Fiscal savings derived from positive dynamics in the commodity sector remain small, especially given the country's increasing commodity dependence.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change.

The main factors that individually, or collectively, could trigger a positive rating action include:

--Significant strengthening of Colombia's external and fiscal balance sheets;

--A higher growth trajectory that supports faster debt reduction and reduces Colombia's income gap with higher-rated sovereigns.

The main factors that individually, or collectively, could trigger a negative rating action include:

--Material and sustained fiscal deterioration that leads to negative debt dynamics;

--Sustained deterioration of external credit metrics;

--Sharp reduction in the country's growth and investment prospects

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to a number of assumptions:

--Fitch assumes that oil prices average USD100 (brent) in 2014 and 2015.

--Fitch assumes that upcoming general elections will not result in a material deviation from the country's record of macroeconomic stability and investor friendly policies.

--Fitch assumes that the internal conflict in Colombia does not jeopardize the country's investment and growth prospects.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Sovereign Rating Criteria' dated Aug. 13, 2012;

--'Country Ceilings' dated Aug. 9 2013.

Applicable Criteria and Related Research:

Sovereign Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685737

Country Ceilings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715618

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=811210

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Contacts

Fitch Ratings
Primary Analyst
Erich Arispe
Director
+1-212-908-9165
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Shelly Shetty
Senior Director
+1-212-908-0324
or
Committee Chairperson
James McCormack
Managing Director
+44 203 530 1286
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Erich Arispe
Director
+1-212-908-9165
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Shelly Shetty
Senior Director
+1-212-908-0324
or
Committee Chairperson
James McCormack
Managing Director
+44 203 530 1286
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com