KEY POINT: Standard and Poor’s decided to upgrade Colombia’s foreign currency rating outlook to Positive –from Stable. The FC rating remains at BB+, one notch below the lowest investment grade ranking. Standard and Poor’s argued in its communication that if the Santos administration follows responsible policies needed to further increase the resilience of the Colombian economy to external shocks, an upgrade could be granted to Colombia’s credit rating. We think that Standard and Poor’s will upgrade Colombia’s foreign currency rating before the end of this year. Keep in mind that Standard and Poor’s already rates Colombian USD-denominated sovereign bonds as investment grade (BBB-), following the view (held by S&P) that the recovery value of Colombian bonds would be high under a restructuring event. We also consider that Moody’s and Fitch will follow the decision to better Colombia’s foreign currency rating at some point in the near future. We expect President Santos to focus on structural policies geared at boosting formal employment and geared at making sure that mining royalties are better spent by the authorities. We do not consider that an approval of a tax reform at this stage of the economic cycle is (1) logical or (2) necessary for Colombia to receive investment grade status (please see our June 21st Colombia Update for a deeper discussion of Colombia’s fiscal dynamics). We think that most of the good news implied by an eventual rating upgrade has been priced-in by the markets (a 5-year Colombia CDS trades only +10bps wide to Mexico). We are upgrading our 2010 growth forecast following the positive performance shown by the economy during the first quarter. We now see Colombia growing +5.0% year-over-year (was +4.5%) in 2010 and +5.5% year-over-year in 2011. We see the Colombian Central Bank lifting interest rates by +25bps in March of 2011.
