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NEW YORK, Feb 17 (IFR) - Markets were largely shrugging off S&P's decision to revise Colombia's outlook to negative on Wednesday, as higher crude prices helped support the oil exporter's bonds.
While S&P's move was seen as the first step to a downgrade, the affirmation of Colombia's BBB rating brought some comfort to investors expecting a more rapid decline in its credit standing - perhaps to junk.
"They can still get downgraded a notch and still keep the investment grade," said a New York-based trader, noting Moody's and Fitch have the sovereign at Baa2/BBB with a stable outlook.
"We are seeing decent demand from locals, as they have more comfort that the government has more time to get its house in order."
The sovereign's 2026s were up about an 1/8 of a point early Wednesday at 93.625-94.125, bolstered by a rise in oil prices.
Markets fret that government has been too slow to address fiscal imbalances caused by the oil plunge as it focuses on ending Latin America's longest-running civil war.
State-controlled oil company Ecopetrol was cut to Baa3 - a notch above junk - by Moody's in January, and many saw a similar fate for the sovereign.
"With oil above US$30 and no two-notch downgrade imminent, it takes away some of the overhang people feared after the Ecopetrol downgrade," said the trader.
But Nomura analysts said S&P's move was a "first alert" for the government, which has delayed presenting fiscal reforms to Congress.
"The government wants to avoid negative spillover for the peace process initiatives," wrote Nomura analyst Mario Castro.
S&P said it still expects Colombia to make fiscal adjustment measures this year after a peace deal is reached.
General government deficit of 3% of GDP this year is nearly double the 1.6% average seen from 2013-2015, it said.
But S&P expects that to drop to 2.3% between 2017 and 2018 as Colombia implements spending cuts.
"We could lower the ratings if the peace negotiations flounder or political developments weaken the government's ability to adjust fiscal policy via a combination of spending and revenue measures," it said.
Nomura warned Colombia is likely to see downgrades sooner rather than later, with concern over how a peace deal impacts discussions over fiscal adjustments.
"Although the market has been pricing in scenarios of rating downgrades, we believe the early S&P decisions ... will continue to weigh on Colombian assets," it said. (Reporting by Paul Kilby; Editing by Marc Carnegie)