Colombia: Sovereign downgraded on revised methodology
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Colombia: Sovereign downgraded on revised methodology

By Zach Fuchs

Local-currency sovereign issues generally give a boost to creditworthiness because they reduce a country’s exposure to FX movements. But even though Colombia has been aggressive in reducing its hard-currency bonds as a proportion of government debt – from 50% to 30% in two years – it is now just one notch away from slipping out of investment-grade territory in its local currency rating.

Moody’s Investors Service pushed Colombia’s domestic currency bond rating down to Baa3 from Baa2 at the end of June, although the country’s other ratings held firm. According to Steven Hess, a senior credit officer at Moody’s, the downgrade has nothing to do with Colombia’s fundamentals. “We’re fixing some ratings that were based on an older methodology,” he says.

As emerging market funds pack their portfolios with local-currency bonds, the agencies are aligning the credit risk of domestic-denominated debt with that of hard-currency debt. Increased foreign involvement in the local-currency markets makes this change necessary. “After all, it’s the same issuer,” says Hess.

Many countries used to inflate their way out of local-currency debt, explaining the previously higher notching. That’s less of an option now that emerging economies are more cautious about their macroeconomic fundamentals.

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