How the investment grade rating impacts Colombia's infra ambitions

S&P and Fitch have downgraded Colombia’s rating below investment grade as result of the social upheaval that started in April as protest against tax reform.

Moody's, however, has retained its investment-grade rating for the country, albeit with a negative outlook.

The rating is especially important considering that PPPs have become prominent in Colombia's infrastructure plans. The 4G highways program, 5G concessions and other projects such as line No.1 of Bogotá’s metro heavily rely on private contributions.

BNamericas spoke with Adrián Garza, Moody’s project finance and infrastructure senior vice president about the rating’s relationship with credit access and the government’s infrastructure financing capacity.

BNamericas: How would a credit ratings downgrade affect Colombia's infrastructure financing capacity?

Garza: There are two main channels. The first is that there are many infrastructure projects anchored with a counterpart from the state.

For example, 4G highways receive future validities, which are a kind of availability payments. From our point of view, these payments are very strong, which distinguishes Colombia's concession scheme from others in the region, but they are only as strong as the source they come from.

Therefore, if Colombia's credit quality deteriorates, these payments also deteriorate. Today, however, we do not see direct or immediate pressure on payments from the sovereign rating.

Another channel is that companies’ rating could be lowered in line with the sovereign’s. That would affect Grupo Energía Bogotá, EPM or Promigas, which operate in the region and are investment grade like Colombia.

For example, Grupo Energía Bogotá has a 'Baa2' rating with a negative outlook, and this outlook reflects that Bogotá city, which is the main shareholder and from our point of view the main supporter of the company, also has a negative outlook, which in turn is related to the negative outlook of the sovereign.

In the infrastructure sector, we also see that these ratings are fully tied to the sovereign.

BNamericas: The 4G highways, 5G concessions and the Bogotá metro, among others, are PPPs. How would a sovereign downgrade affect private financing in these projects?

Garza: I believe that Colombia continues to be a very attractive destination with continuity of the institutional framework that covers these projects.

The risk in any case is cost. A niche of institutional investors is very relevant, and bankers almost always look for investment grade debt instruments. But some investors are also willing to invest in projects with a different risk profile, which are common in Central America, the Caribbean and South America, especially in Brazil.

That translates into a higher financial cost and therefore a more expensive project.

BNamericas: Moody's projects that Colombia's GDP will grow 7% in 2021. How much would infrastructure investment weigh in this figure?

Garza: It is important. Since before the pandemic, most of the region's countries stressed the need to invest in infrastructure as a counter-cyclical measure. Indeed, we think that the infrastructure sector is one engine that underpins economic growth.

BNamericas: The likelihood of passing the revised version of the tax reform is expected to be higher. Would the reform improve the government’s infrastructure financing capacity?

Garza: I think the reform goes more hand in hand with credit quality. If we see that this reform contributes to a better horizon for Colombia's fiscal performance, then it will make its credit quality remain at the investment grade we have today. And with this there will be more projects with financing capacity.

BNamericas: Are Colombian banks in a position to participate in the 5G program given the current situation?

Garza: It has always been a challenge, because the scale of these programs is such that they cannot rely on the local financial system. This is a reality for the entire region.

Financing needs are such that neither governments nor local financial systems can fully assume them, which is why PPPs are used to attract both national and international capital and diversify sources.

Something that I found very interesting was a debt issuance for the 4G Puerta de Hierro-Cruz del Viso highway, which in addition to being a social bond, has a guarantee from US development bank DFC. It is a way in which the country risk of the project is eliminated.

This is a trend that we are beginning to see more; that development banks in Europe and the US are trying to contribute more and design new, more specific products to reduce the gap in the ability of countries to invest in infrastructure and allow them to access international capital markets.

BNamericas: Will the 5G infrastructure program improve Colombia's ratings outlook?

Garza: Yes, in the medium to long term an improvement in connectivity would improve trade activity, both internally and abroad.

This would also be a good sign for the markets; in that sense Colombia has a good track record. Nothing goes smoothly, but several PPPs have already been carried out in the country. Now there are innovative methods like the one I mentioned earlier, and there is still an appetite for this type of project.