Fitch Ratings: Uribe Mandate is Opportunity for Reform.

Business Editors

NEW YORK--(BUSINESS WIRE)--May 30, 2002

The decisive victory of Alvaro Uribe in the May 26 presidential election, and the relatively peaceful outcome of the poll afford the incoming administration a clear mandate for its term to begin August 7 and an opportunity to make progress on economic reform and to improve security. Early statements by Uribe indicate that he will prioritize a more aggressive approach to insurgent groups, an increase in tax levels to support additional security spending, reprofiling of public debt, and maintaining current levels of spending on social programs.

Fitch Ratings believes that early action to complete reform of the social security system and to implement a tax package will be critical to debt sustainability, especially given the added resource demands of increased military and police activity. Reform of the general social security system, which was first presented to Congress in December 2001, is expected to advance in legislative committees through the end of the legislative session on June 20, but no final vote is expected before the new president takes office. The Public Revenue Commission, which has been reviewing potential tax increases, has incorporated members of Uribe's economic team, and will present recommendations to the incoming administration before it takes office. Fitch Ratings will monitor the extent to which the new government can identify new revenue sources to finance additional spending.

Colombia's credit ratings continue to balance its impeccable debt service track record and the general coherence of its economic policies relative to other 'BB' sovereigns, against its rising public debt burden, security costs, diminished growth prospects, and potential external financing pressures. It will be critical for the new government to articulate strategies to address these challenges in the coming months in order to sustain its credit standing. Early progress on internal security, social security reform, and a credible economic plan that balances pressing social needs with mounting debt service obligations must be demonstrated early in order to boost confidence and economic growth, which has been sluggish since 1998. Reflecting weak confidence and diminished growth prospects, investment was a low 13.8% of GDP in 2001, down from 20.8% of GDP in 1997.

Growth and consistent primary surpluses will be the linchpin of Colombia's debt sustainability over the medium term. With public debt at 46% of GDP, effective real interest rates of approximately 5%, and growth expected at about 2% this year, debt stocks should remain roughly stable this year if the projected primary surplus of 2.4% of GDP is achieved. Going forward, pressures to deliver significant primary surpluses will continue because of the growing cost of servicing the large actuarial liability of the public pension system, most recently estimated at 206% of GDP. Authorities estimate that even if reforms of both the general and privileged pension systems currently under consideration by congress are enacted, the unfunded liability would remain at roughly 130% of GDP. The pension system, currently in balance on a cash basis, will begin generating growing cash deficits in 2003 with or without proposed reforms, creating mounting pressure on fiscal balances. Larger primary surpluses and more robust growth will therefore be necessary in order to stabilize debt stocks at current levels, the prospects for which will be difficult in the context of a violent insurgency.

President-elect Uribe has announced his intention to reprofile external debt on more favorable terms, which may include extending the maturity of market and multilateral debt and greater reliance on multilaterals as a source of funding. The profile of Colombia's $25 billion in external debt is generally favorable compared to other 'BB' sovereigns, with an average maturity of 6.2 years, and no single year accounting for more than 15% of the total outstanding. With $2.6 billion maturing in 2003, however, debt management authorities have been evaluating potential transactions to swap maturities coming due in the next three years for longer dated securities and multilateral borrowing. Such a transaction could reduce rollover risk and generally improve the Republic's credit profile.