Fitch Affirms Colombia's FC IDR at 'BBB'; Outlook Stable

Fitch Ratings has affirmed Colombia's long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB' and 'BBB+', respectively, with a Stable Outlook. The issue ratings on Colombia's senior unsecured foreign and local currency bonds are also affirmed at 'BBB' and 'BBB+', respectively. The country ceiling is affirmed at 'BBB+' and the short-term foreign currency IDR at 'F2'.

KEY RATING DRIVERS

Colombia's IDRs reflect the following key factors:

Colombia's flexible and credible policy framework, improved external buffers and stronger macroeconomic performance in relation to 'BBB' peers balance high commodity dependence, increased external vulnerability, limited fiscal flexibility and structural constraints in terms of low GDP per capita and weak governance indicators.

A record of policy continuity and consistency has entrenched macroeconomic and financial stability through political and economic shocks such as the present decline in international oil prices. The flexibility of the Colombian peso to absorb the external shock has been significant reflecting Colombia's favourable starting position in terms of financial system robustness, limited FX mismatches in the economy and low inflation.

International reserves stood at USD47.2 billion at the end of April 2015 (six months of CXP) and the central bank has not sold USD in the FX market to stem the peso depreciation. Fitch expects Colombia to renew access to the International Monetary Fund's Flexible Credit Line (FCL) to further buttress Colombia's shock absorption capacity and policy credibility.

Fitch expects the Colombian economy to expand by 3% in 2015 and 3.5% in 2016, as the challenging external environment will likely lead to a more moderate growth trajectory, albeit stronger than regional and rating peers. Still resilient domestic demand, a weaker COP and the beginning of the 4G infrastructure program could partly balance weaker terms of trade and rising external borrowing costs.

Inflation has risen above the inflation target range of the central bank in the first months of 2015 (4.6% in April), but inflation expectations remain anchored. Hence, inflation is likely to remain below 'BBB' peers. The space for monetary policy stimulus is presently constrained, though, by the presence of large external imbalances and the need of the Colombian economy to adjust to low oil prices.

Colombia's external vulnerability has increased due to high current account deficit (5.2% of GDP in 2014), increased external indebtedness and larger participation of non-residents in the local government debt market. An improving trade balance, due to the real depreciation of the COP, a reduced income account deficit and a mild recovery in international oil prices are likely to prevent further CAD widening, but deficits are likely to remain higher than the 'BBB' median.

Supportive financing conditions in terms of cost and maturity profile, continued external market access and limited FX mismatches mitigate refinancing risks. While non-resident participation in the local debt market increased since 2014 to USD13.3 billion by April 2015, external liquidity remains slightly stronger than 'BBB' peers.

Fiscal policy flexibility is constrained by a narrow revenue base, a rigid expenditure profile and limited fiscal savings. In spite of expenditure adjustment, reduced revenues from low oil prices and weaker growth will increase the central government deficit to 2.9% of GDP in 2015. While the country's fiscal rule could allow for a higher nominal deficit (3.1% of GDP in 2016), a policy response will be necessary to put public finances back on a consolidation path.

General government debt, at 42.3% of GDP in 2014, is expected to increase in line with the 'BBB' median, but upside risks for Colombia's debt trajectory are present. However, deft liability management has improved currency, refinancing and interest rate risks. General government debt maturities will average 3% of GDP in 2015-2016, below 5% average for the 'BBB' median.

The successful implementation of a peace agreement would provide medium- to long-term benefits for the Colombian economy. In the near term, though, Colombia's growth potential is unlikely to improve significantly. Moreover, investment in the development of conflict areas (rural), combatants' demobilization, victims' reparations and institutional development are likely to require significant resources.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's view that upside and downside risks to the rating are broadly balanced. The main risk factors that, individually or collectively, could trigger a rating action are:

Negative:

--Fiscal deterioration that leads to a rising debt trajectory;

--Deterioration of external credit metrics.

Positive:

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

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

--Improvement in governance indicators reducing the gap with 'BBB' peers.

KEY ASSUMPTIONS

The ratings and outlooks are premised upon a number of assumptions:

--Fitch assumes that oil prices average USD65 in 2015 and USD75 in 2016.

--Fitch assumes that authorities will undertake fiscal policy measures to confront the oil shock and lower growth.

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

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Sovereign Rating Criteria' (Aug. 12, 2014);

--'Country Ceilings' (Aug. 28, 2014).

Applicable Criteria and Related Research:

Sovereign Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754428

Country Ceilings

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752194

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985214

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