In the presidential elections for the 2022-2026 period, the economy took on special importance given the global and national situation, which after the covid-19 pandemic deepened some elements such as inflation, poverty and unemployment.
Although these problems are the ones that citizens perceive the most, the fiscal position of the country, on the other hand, is another latent risk for the economy, and that is under the scrutiny of governments, banks, risk rating agencies and investors. , as a result of higher social spending left by the health crisis.
(Read: More than 27,000 votes received candidates who withdrew).
Richard Francis, Fitch Ratings sovereign rating leader for Colombiaspoke with Portafolio about the impact of the elections on the country’s fiscal situation, the challenges that the next president will have to meet spending needs, and the possibilities he will have of approving a new tax reform to finance the level of spending current.
How much can the elections affect or influence the fiscal situation of the country?
Colombia’s fiscal position is still relatively fragile with three years of fiscal deficits close to 7% of gross domestic product (GDP)and the ratio of debt to GDP increasing by almost 15 percentage points since 2019.
We expect fiscal consolidation next year, given that 2021 will start to pay off and that most of the expenses related to the pandemic will also end.
However, we believe that more fiscal measures would be needed to reduce the fiscal deficit enough to start reducing the debt burden and comply with the updated fiscal rule approved last year as part of the reform.
Richard Francis, Fitch’s Head of Sovereign Ratings for Latin America.
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Furthermore, social pressures for additional spending will continue, no matter who wins the presidency. In addition, the tax reforms They will also be difficult to achieve, as the 2021 protests showed.
With current spending levels, is it necessary for the next government
push for another tax reform?
Expenditure is quite inflexible in the case of Colombia, with the exception of spending on infrastructure. However, cuts in capital expenditure hurt investment and growth prospects.
As noted, there are also pressures to increase social spending. Therefore, to reduce debt relative to GDP in a sustainable way and increase social spending, efforts would be needed to increase revenue.
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Efforts to increase revenue through the tax administration have paid off, but tax reform will most likely also be needed.
What elements should this eventual tax reform have?
The type of reform would be in the hands of the next government, but obviously it would have to be politically feasible.
Given the current makeup of Congress, how feasible might it be for the new president to pass some key reforms?
The Congress is quite fragmented and no party of the candidates will have more than 20% of the votes. So, whoever wins, it will take compromise and coalition building to pass legislation.
How do you perceive the level of debt and fiscal deficit that the new government will receive?
Colombia’s debt has risen to close to 60% of GDP, almost 15 percentage points above where it was before the pandemic. And the fiscal deficit has been close to 7% of GDP for three years in a row.
(Read: More than 300 thousand people voted blank in the first round).
On the positive side, we expect Colombia to achieve one of the highest growth rates in Latin America in 2022. In addition, the tax reform approved in 2021 and the end of pandemic-related spending next year should lead to a significant reduction in the deficit. next year no matter who wins the election.
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