Colombia : A Macro update

Colombia lost investment grade status by S&P in May 2021 (BB+ with stable outlook) and by Fitch in July 2021 (BB+ with stable outlook) after the government failed to approve an ambitious fiscal reform to increase revenues, which triggered massive street protests. However, the credit retains investment grade status by Moodys (Baa2 with negative outlook). We continue to forecast 2021 GDP growth at 7.3% YoY after the collapse of the economy of -6.9% YoY in 2020. W e wouldn’t discard a 25bps rate hike on Sept 30. We forecast the policy rate at 2.25-2.50% for year-end 2021. Sometime in September, congress will likely pass the fiscal reform that FinMin Restrepo sent to congress in early August. The revenue generating capacity of the reform (1.4% of GDP) will come from increases in corporate tax hikes (60%), fighting evasion and spending cuts (40%). We believe that if Petro were to win the election, he would implement moderate-left policies that will keep the independence of the centra l bank and the compromise to gradually return debt to GDP to a downward path. We forecast the USDCOP at 3,820 by the end of 2021 and at 3,780 by the end of 2022. Key for our forecast is the expectation that oil prices will remain well supported in 2022.