Fitch Rates Colombia's US$1 Billion 2017 Global Bond 'BB'

Business Wire, July 24, 2006

NEW YORK -- Fitch rates the Republic of Colombia's US$1 billion issue of fixed-rate Global Bonds maturing January 27, 2017 'BB'. The rating is in line with Fitch's long-term foreign currency rating on Colombia. The Rating Outlook is Positive.

Fitch revised the Outlook on Colombia's long-term foreign currency Issuer Default Rating (IDR) to Positive from Stable last month based on improvements in key public and external solvency indicators over the past two years and the expectation that recent trends will improve going forward, albeit more slowly.

'Authorities have taken advantage of a favorable external environment to reduce the vulnerability of public debt to exchange rate risk, repaying external debt and raising the proportion owed in local currency to 68% while maintaining a relatively long five-year average maturity primarily at fixed rates,' said Morgan C. Harting, Fitch Senior Director and lead sovereign analyst for Colombia. 'In view of the weakness in the Colombian peso over the past several months, these adjustments appear to have been particularly well-timed. The issuance of 2017 appears to mark the beginning of a return to more balance between local and external financing.'

Net external debt declined from 133% of CXR in 2003 to 72% of CXR in 2005, though it is still a good deal higher than the 44% of CXR 'BB' peer median. Vulnerability of the economy as a whole to external shocks has also fallen as Colombian firms have gained international competitiveness and as a longer track record of low and stable inflation may now allow the potential for some counter-cyclical monetary policy. External financing needs have come down but are still higher than peers relative to broad exports, and these requirements come disproportionately from the public sector. But authorities have accumulated significant assets that would serve as a buffer in the event that international markets cooled to the Andean country for some time and the 2017 issuance will add to this position.

'Because most public and external debt ratios are still generally above peers, Fitch's assessment that Colombia's creditworthiness is trending toward 'BB ' therefore rests on a superior qualitative assessment of debt tolerance and credibility,' said Harting. The first Uribe administration moved to contain deteriorating public debt dynamics with a pension reform and a temporary asset tax. Harting also said that 'Because his coalition gained a majority in the March congressional elections and he won by a wide margin on May 25, President Uribe now has a strong mandate and a second term should bode well for economic growth and fiscal management. Fitch expects economic policy to focus on consolidating recent improvements.' A free trade agreement with the U.S., tax reform and an extension of caps on transfers to local and regional governments are all expected to come to a vote before Congress this term, and prospects for passage appear favorable. These policies should help keep public and external debt ratios on declining trends going forward, though none of them is particularly path-breaking.

Should the Colombian administration choose to take advantage of its strong electoral mandate to include another round of pension reform among its economic priorities, this would be particularly beneficial for the credit because shortfalls in the retirement program are a key source of fiscal weakness. Positive momentum in the credit could stall or reverse if the government fails to gain passage of its economic agenda or if confidence deteriorates significantly. A sharp reversal in global risk appetite could also have adverse effects on Colombia's creditworthiness because of its higher than average external financing requirements.

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