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Colombia Politics May 2023

Colombia: Fiscal rule and central bank independence likely to remain following reshuffle; Colombian assets and governability to take a slight hit

President Petro announced the end of his congressional alliance on 25 April after three of its centrist member parties refused to back a health reform bill.

The following day, Petro reshuffled his cabinet, most notably replacing José Antonio Ocampo—who was well-respected by investors—as Finance Minister with Ricardo Bonilla, a long-standing ally of the president.

The economists polled by FocusEconomics expect Petro to continue respecting the fiscal rule and Central Bank independence after the reshuffle. Colombian financial assets and governability will take a slight hit.

If the government’s planned reforms—which would primarily benefit poor Colombians—are not passed, it could stoke social tensions and raise political risk.

The fiscal rule: 100% of the economists we polled see the government continuing to follow the fiscal rule in 2023 and 2024. Although Bonilla may not have as much independence from Petro compared to Ocampo, ditching the fiscal rule would likely be too costly given that it could significantly hurt Colombia’s access to international capital markets. According to the rule, the government cannot run a deficit on its primary balance—the budget balance excluding interest payments—in excess of 1.4% of GDP in 2023 and 0.2% in 2024.

Central Bank independence: Petro has been critical of the Central Bank in recent months, stating that its interest rate hikes were damaging the economy. 62.5% of the economists we polled see the Central Bank retaining full independence after the reshuffle. The rest see the Central Bank retaining its independence to at least some extent. These survey results suggest that although the new-look cabinet may raise pressure on the Central Bank to lower interest rates, it is unlikely to interfere in its decision-making process directly. Both Petro and Bonilla have pledged to retain the Central Bank’s independence, which is currently enshrined in the constitution. Reducing that independence would hurt the Central Bank’s credibility and, thus, its ability to control inflation.

The financial sector: Colombian financial assets fell after the reshuffle but have since regained some ground. Moody’s, one of the major debt rating agencies, stated in early May that the political uncertainty created by the reshuffle could undermine investor confidence. In line with this, 50% of the economists we polled see the political uncertainty created by the reshuffle negatively impacting Colombian financial assets to some extent in 2023 and 2024, while 12.5% see a significant negative impact. Meanwhile, 37.5% see no negative effect. Maintaining fiscal prudence and respecting the country’s independent institutions will be key to limiting financial fallout ahead. Moreover, the increased political gridlock as a result of the breakdown of the president’s coalition may be a net positive for Colombian assets by blocking the passage of radical reforms. That said, if the reforms—which would increase the living standards of poor Colombians—are not passed, it could stoke social tensions and therefore raise financial risk.

Politics: 62.5% of the economists we polled see gridlock in Congress increasing to some extent as a result of the reshuffle, and 25% see gridlock rising to a large extent. 12.5% see no increase in gridlock. The president’s ambitious reform agenda was already facing obstacles before the breakup of his coalition and his move to the political left; flagship policies such as reforms to the labor market, pensions and health system are now likely to be watered down or blocked given the president’s weaker political clout. That said, the recent passage of the government’s National Development Plan, with large majorities in both chambers of Congress, shows that across-the-aisle political agreements are still possible for the government. In addition, the president will still be able to undertake some unilateral measures at the executive level, such as managing subsidy spending and regulating the energy sector.

The EIU commented:

“The premature dissolution of the coalition, coupled with the dismissal of moderate ministers (especially that of Mr Ocampo), will usher in a period of heightened political and economic instability and uncertainty, which will weigh on private investment, cause currency depreciation and produce growing downside risks to our GDP forecasts.”

Analysts at Goldman Sachs said:

“We think that the market focus will be on whether Mr. Bonilla will effectively assert his independence, bolstering the Ministry’s credibility and reassuring investors and market participants about his commitment to continuing with Mr. Ocampo’s fiscal consolidation. We will have a better gauge of the government’s fiscal plans at the presentation of the annual medium-term fiscal framework in June.”

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