Fiscal Balance in Colombia
Colombia - Fiscal Balance
Tax reform in jeopardy after peace deal is rejected
In what was a narrow and shocking result, Colombians rejected the peace agreement between the government and the FARC at the 2 October referendum. The deal, resulting from years of tough negotiations, aimed to end more than 50 years of war in which thousands of civilians were killed and millions were displaced. While most polls had projected a comfortable victory for the “Yes” vote, the “No” camp managed to win by a razor-thin margin of less than 54,000 votes in a contest marked by low voter turnout. The peso and the stock market quickly lost value following the vote as the clouds of political uncertainty moved across the horizon.
It is largely unclear what is next for the peace process. President Juan Manuel Santos announced that the ceasefire will remain in place and that negotiations with the opposition will continue, while the FARC said they would remain open to dialogue. Although Santos could seek to have a version of the peace agreement approved by Congress—where a majority of legislators have favored the deal—this option seems unlikely as it would face major criticism from the public. In this context, Alvaro Uribe, the former president and influential supporter of the “No” campaign, has now become a key player in any second attempt at a peace deal. He is likely to push for tougher sanctions against the rebels should there be a renegotiation.
The rejection of the peace agreement represents a major defeat for the president, who wagered all his political capital on the outcome. Although the government still holds a legislative majority, Santos’ long-awaited and unpopular tax reform bill now faces an even slimmer chance of being approved by Congress. The proposed fiscal reform aims at improving the government’s finances, which have been battered by the collapse in prices for oil, Colombia’s main export and source of foreign exchange. Regarding the tax reform and the result of the referendum, JPMorgan’s Emerging Markets Sovereign Risk Analyst, Ben Ramsey, and Economist Katherine V. Marney stated:
“Markets and rating agencies (both Fitch and S&P have a negative outlook on their BBB ratings) have been anticipating an ambitious “structural” tax reform, looking to raise above 2% of GDP in new revenues, while reducing the burden on the formal corporate sector. Even expecting a “yes” win, the reform outlook was challenging, as its crux was expected to be a politically unpopular VAT tax hike. Nonetheless, we had been willing to give the benefit of the doubt that a reform sufficiently strong to avoid ratings downgrades was possible. Now, in the context of the plebiscite surprise, even submission of the reform seems uncertain until further notice. With Santos’ political capital at a minimum, the fate of the reform may also depend on the Uribista opposition’s support and congressional sensitivity to negative market reactions.”
The vote against the peace deal poses other downside risks to Colombia’s medium-term growth prospects. In fact, the government had estimated a so-called peace dividend that would have added one percentage point to annual GDP growth. Long-lasting peace would likely have boosted tourism, oil exploration and foreign direct investment in the conflict-ridden areas of the country. Moreover, it would have allowed the government to shift resources from military spending to more productive areas. For now, Colombia’s faltering economy will have to look for other ways to reignite growth until peace is finally achieved.
Colombia - Fiscal Balance Data
|Fiscal Balance (% of GDP)||-2.3||-2.4||-3.0||-4.0||-3.6|
5 years of economic forecasts for more than 30 economic indicators.
|Bond Yield||5.86||0.0 %||Sep 04|
|Exchange Rate||3,396||-0.17 %||Sep 04|
|Stock Market||12,686||-0.66 %||Sep 04|
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September 5, 2019
Consumer prices rose 0.09% over the previous month in August, following a 0.22% month-on-month upturn in July.
September 3, 2019
Exports sank 9.9% over the same month of the previous year in July, following the 8.7% year-on-year decline in June.
September 2, 2019
Business conditions in Colombia’s manufacturing sector continued to improve in August, albeit to a lesser degree than in July.
August 22, 2019
Economic growth edged down to 3.0% year-on-year in the second quarter, from an upwardly revised 3.1% in the first quarter (previously reported: +2.8% year-on-year) .
August 20, 2019
Consumer sentiment improved in July, albeit remained in pessimistic territory.