Colombia: Authorities roll out measures to mitigate economic impact from Covid-19 pandemic; credit rating downgraded amid increased risks to export revenues
Since declaring a state of emergency on 17 March, the Colombian authorities have rolled out a wide set of relief measures aimed at cushioning the economic fallout from the Covid-19 shock. Amounting to approximately 2.5% of GDP, the measures have been aimed at the most vulnerable groups of the population as well as to mitigate the fiscal burden for small- and medium-sized firms through increased monetary support, tax deferrals and credit lines However, increased spending, coupled with low oil prices, is likely to widen the fiscal deficit while pressuring revenues.
On 18 March, the government announced a first round of fiscal measures worth COP 14.8 trillion (approx. USD 3.8 billion), including additional funding to the public health system and cash transfers to support low-income households. Furthermore, the government declared the provision of new credit guarantees of up to COP 4.0 trillion (approx. USD 1.0 billion) in the private sector as well as deferrals of capital payments of existing loans. Later, the government announced further measures to mitigate the strain on small- and medium-sized firms, by cancelling pension contributions by both employers and employees; taking over salary payments for employees that earn up to five minimum wages (about USD 1,110); and allowing SMEs to issue state-guaranteed bonds—increasing the worth of credit guarantees to up to COP 12 trillion (approx. USD 3.0 billion). Lastly, on 9 April, the Ministry of Finance requested a renewal of its USD 10.8 billion flexible credit line with the IMF for this year to safeguard the current account against external shocks.
Increased government spending and the sharp fall in global oil prices in March will lead to a widening of the budget deficit as tax revenues are put under pressure. Consequently, Fitch Ratings downgraded Colombia’s credit rating to BBB- from BBB on 1 April and also changed the outlook from stable to negative. This followed S&P’s decision to change the outlook from stable to negative on 26 March, citing heightened risks to export revenues.
Commenting on the policy response, Daniel Velandia, head of research and chief economist at Credicorp Capital, noted:
“We do not rule out that the MoF (Minister of Finance) will be forced to take additional actions to face the current situation as we are of the view that the fiscal policy is the key tool to avoid a deeper than expected deterioration of activity and social conditions. The limiting factor may be the sovereign rating, especially after recent actions from S&P and Fitch that now have their rating at BBB with a negative outlook, leaving the country at the edge of losing the investment grade status. Favorably, the MoF has affirmed its intention to avoid a further deterioration of debt ratios using resources available in regional and saving funds to finance the said fiscal plan, which could lower the likelihood of credit downgrades. However, the potential need of extra spending efforts and very low oil prices mean that fiscal accounts will remain under significant pressure.”