According to former Environment Minister Susana Muhamad, Colombia has rejected offers for a debt-for-nature swap over concerns that such a deal could impact the country’s sovereign credit rating with multilateral banks.
Many developing countries approve debt-for-nature swaps to free up funds for energy transitions by refinancing a portion of their debt and allocating the savings to environmental projects.
Muhamad, who resigned as environment minister last month due to differences with President Gustavo Petro, stated, “Colombia’s concern is that a debt-for-nature swap could send the wrong message to the markets and worsen our financial situation.”
Colombia debt-for-nature swap is not a priority
According to Bloomberg Green, a spokesperson for Colombia’s Environment Ministry confirmed that the former minister’s comments reflect the administration’s current stance on a potential debt-for-nature swap deal.
Muhamad further explained, “Because we are a middle-income economy, the financial markets look at us differently than if we were a country struggling with debt,” adding, “We need to increase fiscal capacity for the climate transition, but without signaling to the markets that we are unable to pay our debt.”
This year, Colombia was forced to seek alternative financing for its transition to sustainable energy after the newly elected Trump administration scrapped a $40 billion green investment deal. Colombia now faces the same challenge as many other developing nations: securing the necessary funding for its energy transition.
Former Minister Muhamad explained why a debt-for-nature swap has not been a viable option for Colombia, stating, “All the deals that are coming our way are very specific and very small,” making them not worth pursuing.
The nature of these deals has not deterred other developing countries from accepting them. The first debt-for-nature swap was arranged by Credit Suisse for Belize in 2021. Since then, Ecuador, Barbados, Gabon, El Salvador, and the Bahamas have struck similar agreements with Bank of America, JPMorgan Chase & Co., and Standard Chartered.
These deals typically involve credit enhancement from a multilateral development bank or another international financial institution, which lowers borrowing costs and provides access to a broader investor base. However, for such agreements to be worthwhile, the savings from reduced borrowing costs must outweigh the additional fees associated with structuring these complex, customized deals.