Bad news everywhere
The nuts and bolts of the 2024 MTFF have little to do with the much-required process of fiscal consolidation. It turns out most of the negative rumors we’d been hearing were true. A root problem behind the mess was over-optimistic initial revenue estimates. The central government originally expected $88.1 billion in total revenues for 2024, but has been forced to revise that figure dramatically downward, to just $72.2 billion. No wonder the recently-sacked head of Dian, Mr. Reyes, is no longer referred to as “Mr. Taxes;” his new nickname is “Mr. Deficit.” Even though the deficit allowed under the Fiscal Rule this year is now 5.6% of GDP, substantially higher than the 4.4% announced initially, when the budget was approved, the collapse in revenues will nevertheless require a substantial cut in primary spending. The government recently announced its decision to freeze spending, and has publicized the importance of this fiscally responsible move. But the hard truth is that the effort is far from what is required: the freeze, totaling COP 20 trillion, or $5 billion, is less than half of the $11.4 billion needed to make ends meet. In other words, on top of the spending cut announced by the government, an additional spending reduction worth $6.4 billion will have to be produced. It’s far from certain that this can be achieved. This has produced a terrible fiscal outlook, far worse than our most acid scenarios. Under one scenario, this could prompt a new downgrade for Colombia’s sovereign debt. That probably won’t happen this year, but we consider it plausible for 2025.
The COP depreciated more than 9% in nominal terms between mid-May and mid-June – its direction and extent an unsurprising reflection of government policymaking (the surprise is that the election of Claudia Scheinbaum to the presidency of Mexico may have been the trigger, instead of the Central Bank crossing some threshold in reducing its nominal intervention interest rate, as we’d been expecting). But the exchange rate, given its role as a sponge, may be absorbing many challenges and dilemmas. To wit: 1. this depreciation could stoke inflation, and make it more difficult to cut interest rates or, 2. the government might feel compelled to pursue a more expansionary fiscal policy, risking compliance with the fiscal rule, an issue that could further weaken the COP. Market participants are already anticipating both potential challenges, which could push government bond valuations into junk territory. There are rumors of a new tax reform, a new fiscal rule, prolonging of diesel subsidies, and new healthcare and public utilities reforms that would extend the stalemate with Congress, underscoring President Gustavo Petro’s lack of governability, and uncertainty over macroeconomic equilibria. An eventual Donald Trump victory would present the Colombia government with new and more severe foreign policy dilemmas. And all of these issues would be absorbed by the exchange rate.
With merry celebrations both by the government and Congress, it was announced last week that the pension reform had been approved in its final (fourth) debate in the plenary of the lower chamber (LC). The announcement caught many people off guard, as the bill had just entered the plenary, from the LC’s 7th committee. But most of the surprise emanated from the fact that the government had decided to avoid reconciliation of the texts from the two houses of Congress. Why? And how could both texts be identical? The answer was simpler than anyone thought: the government grew extremely worried that the reform could sink during reconciliation and, since this process could not unfold in extra sessions, clearly there would be no time to reconcile big differences before June 20th. So the government instead pushed hard to avoid reconciliation, by resorting to an old formula, used at least twice in the past, with negative results in the end. While the reform was approved, we don’t know whether it will be in force a year from now. It will face challenges on several fronts: in the courts and from the many demands now enroute, the approval of the “mini” reform that may open a whole new discussion for the government for which it is surely not prepared, and the implementation of huge changes for a poorly and unprofessionally managed Colpensiones (the administrator of the pay-as-you-go pension system). These challenges don’t look good today. In any case, it will be better for Colombia if the reform is reversed or sunk in the end.
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