LONDON (Reuters) – Wall Street banks JPMorgan and Morgan Stanley predicted on Thursday that Fitch would downgrade Colombia’s credit rating to junk before the year is out and spark forced selling after a similar move by S&P Global Ratings on Wednesday.
Colombia has come into focus after President Ivan Duque was forced to withdraw a tax reform proposal seen as important for fiscal stability in early May amid staunch opposition from lawmakers and deadly street protests.
On Wednesday, S&P Global Ratings lowered its long-term foreign currency rating on Colombia to BB-plus from BBB-minus, predicting that fiscal adjustment will be more protracted and gradual than previously expected.
“It is highly likely that Fitch will choose to join them once the fate of the fiscal package is clarified, probably in 3Q, becoming the second agency to rate Colombia sub-investment grade,” JPMorgan’s Katherine Marney wrote in a note to clients.
Ratings agency Fitch rates the South American country at the lowest investment grade rank, with a negative outlook, while for Moody’s it is two notches above “junk.”
“Exact timing is difficult, with the bottom line instead being that we think the downgrade is coming close enough for markets to trade on it,” said Morgan Stanley’s Simon Weaver, who also predicts that Fitch will become the second ratings agency to slash Colombia to junk.
In May, JPMorgan calculated that Colombia could suffer outflows of more than $11 billion from its fixed income markets upon losing its investment grade ratings. This would include $3.2 billion out of its hard-currency sovereign bonds, $3.5 billion out of local sovereign treasury bonds as well as $4.7 billion of potential outflows from investment grade corporates.
Morgan Stanley said the impact of a potential full downgrade to high yield for Colombia was not yet in the price, although it said there could be potential forced selling of as much as $5.1 billion.
“Another 50 basis point widening would at least bring Colombia closer to the level where other downgraded credits ended up trading six months after being downgraded, meaning around 240 bps for 10-year spreads,” Weaver said.
Investment grade ratings from several agencies are a condition for inclusion of bonds in many key indexes while junk ratings preclude some investors from putting money to work in a country, with downgrades leading to forced selling especially among index tracking investors.
Morgan Stanley’s Weaver also said the ratings action could prompt the central bank, which kept a close eye on financial stability considerations and attached forward guidance to fiscal concerns, to hike rates sooner than October, which was his previous estimate.
(Reporting by Karin Strohecker, additional reporting by Marc Jones; Editing by Simon Cameron-Moore and Hugh Lawson)
