Bogotá — Colombia’s central bank set off down the path of lowering interest rates in December with a 25 basis-point cut, and now it is preparing to do so again, this time by 50bps. According to Juan Carlos Mora, the president of Bancolombia (BCOLO), these decisions won’t suffice for Colombians to start feeling relief in the interest rates that banks offer them.
The president of Colombia’s largest bank by total assets told Bloomberg Línea that the impact of rate reductions on the general market “will take time.”
Greater stringency for loans
“The non-performing loan portfolio has grown, but in January, we’ve seen a reduction in such deterioration,” said Mora. Although he interprets this trend as a positive sign, the executive expects the bank’s loan portfolio to grow slowly in 2024.
Bancolombia has been adjusting its origination policies due to the increasing defaults from individuals, he added. “We had a change in policies; we introduced some restrictions because the risk is higher. There have been changes in parameters and policies in consumer credit,” he said.
Stricter requirements have only been applied to individuals, as companies are still hesitant to request too much credit, although they are slowly approaching the banking sector. “It looks more dynamic, but companies are cautious due to the level of interest rates and are waiting for rate cuts before seeking new loans,” Mora added.
Relief from interest rate cuts will take time
Although the Colombian central bank began lowering rates in December, Mora says banks won’t start to reflect looser monetary conditions in the short term. “It takes time,” the president of Bancolombia warned, explaining that the transition of monetary policy is calculated to take about 6 months. However, he clarifies that, “it’s important to understand that it has decreased very little, and that transmission will be delayed. I don’t think it will be effective and significant until the second semester.”
Regarding the conditions that must be met for the interest rate cuts to be reflected in individual loans, Mora explained that “market rates should decrease as the Banco de la República signals a decrease in interest rates. But it takes time; it’s not something that happens immediately because it requires mobilizing all rates, both active and passive, in the economy.”
Moderate optimism about Colombia’s credit rating
Only a week ago, S&P issued a warning to Colombia to improve its economic growth or prepare for a further downgrade in its sovereign credit rating. With the country’s outlook now negative, the rating agency issued the ultimatum before the country moves another step away from the investment-grade (BBB), which it lost in 2021.
Despite this, Mora remains optimistic that Colombia’s rating will not be downgraded below the current BB+. “I’m not so pessimistic. I believe that 2024 will be a transitional year with low economic growth, but in 2025, economic growth will be much better.”
For Mora, the conditions for a prosperous 2025 will be in place with significantly lower interest rates, much more moderate inflation, and the conditions set to reactivate the productive sector.
Although S&P’s warning was about the low GDP growth, Mora considers it an alert about Colombia’s fiscal position. “S&P’s warning in the outlook speaks a lot about the fiscal position, and it focuses on how that growth affects the country’s fiscal situation. That’s where we need to focus, on how fiscal management will be and how it is managed according to the government’s income.”
Lingering concerns about reforms
“The labor reform is not intended to reduce informality; it has other purposes, but not that of generating formal employment,” said Mora.
As for the pension reform, which has been said to end the capital market, Mora said, “A country does not develop if it does not have a strong capital market.” For the bank’s president, the Colombian capital market has been languishing more and more, and he warns that “if that is not taken into account in the pension reform, that is, who the actors will be and how they will generate that dynamic in the capital market to invest in bank bonds, or companies, or to develop infrastructure through bonds and long-term financing, that will continue to affect us.”
Finally, he referred to the tax reform proposed by President Gustavo Petro and Finance Minister Ricardo Bonilla, aiming to reduce taxes on companies, and he is not optimistic that it will be successful. “Reforms are made to collect more taxes, not the other way around. Therefore, that redistribution will require someone to pay more taxes because there will be others who pay less. In that redistribution, it must be understood that individuals will pay the taxes that companies will stop paying, and that doesn’t seem easy from any perspective, neither political nor in terms of capacity, because one of the big burdens of an informal economy is that it does not pay taxes or does so in a very small fraction. That is much more structural than presenting a reform.”