UPDATE 1-Colombia's bonds tumble as credit rating worries mount

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By Marc Jones

LONDON, March 5 (Reuters) - Colombia's dollar-denominated bonds fell on Friday to their lowest in eight months as a government financial health warning fanned worries the country could lose its prized investment grade credit rating awarded a decade ago.

Colombia's 2021 fiscal deficit forecast on Thursday came in well above market expectations, with the finance ministry ratcheting it up 8.6% from a previous prediction of 7.6%.

With markets still digesting the news and also suffering broader global pressure, Colombia's 2029- and 2030-maturing dollar bonds dropped 1.2 cents and 2 cents respectively.

Governments covet investment grade status, which generally lowers borrowing costs in financial markets. Colombia is currently rated the lowest investment grade BBB- and on a downgrade warning with both S&P Global and Fitch.

Fitch stressed last week the rating was under threat if there was a "failure to take structural fiscal measures" or a tax package which the government has said will cut back VAT exemptions to increase its revenues is "heavily watered down".

Until last year Colombia was one of Latin America's fastest growing big economies, but the coronavirus pandemic has hit it hard.

The $285 billion economy shrank by nearly 7% in 2020, its worst drop on record, while debt jumped from around 45% of gross domestic product to above 60%. The rise in oil prices should help reinvigorate growth this year though, with S&P expecting a 5.1%.

"Colombia may risk losing its investment-grade status over President (Ivan) Duque’s tax reform package," analysts at Citi said.

(Reporting by Marc Jones; Editing by Julien Ponthus and David Gregorio)