According to Fitch, Colombia’s Revised Deficit Targets Heighten Fiscal Uncertainty

Colombia’s new Medium-Term Fiscal Framework (MTFF) highlights the continued deterioration in the country’s fiscal position and increases uncertainty about prospects for corrective measures, Fitch Ratings says. These factors were central to its revision of the Outlook on Colombia’s ‘BB+’ sovereign rating to negative in March this year.

The MTFF published on 13 June raises the 2025 central government deficit target by 2pp, to 7.1% of GDP, with subsequent increases of 1.4pp in 2026 and 0.8pp in 2027, to 6.2% and 4.9%, respectively. The deficit-reduction plan in the MTFF relies on uncertain revenue measures, including unspecified tax reform, and back loaded spending cuts to be implemented by the next administration after elections next year.

The MTFF is consistent with Fitch view in March that ongoing revenue underperformance and the reluctance of President Gustavo Petro’s administration to sacrifice spending priorities means that it would struggle to meet fiscal targets. According to Fitch, the slippage is greater than was anticipated in March, when it forecast a central government deficit of 6.2% of GDP.

Revisions to previous deficit targets, suspension of the fiscal rule, and wide deviations from budget projections have weighed on fiscal policy credibility. This is compounded by the activation of the escape clause, suspending the fiscal rule for three years to accommodate the larger deficits. Finance Minister German Avila said this was necessary to avoid harming economic growth and stability, and because 86% of the 2025 budget consists of inflexible items, thereby preventing near-term spending cuts. Several factors, including higher interest costs and social security and health transfers, have increased budgetary rigidities.

The government plans to gradually reduce the central government fiscal deficit by 3.4pp of GDP, via a combination of revenue measures (1.4pp) and expenditure cuts (2pp), aiming to bring the deficit to below 3% of GDP by 2030 and stabilizing it at about 2.8%. Under this plan, central government debt would rise from 59.3% of GDP in 2024 to 63.8% in 2027 and then decline slowly thereafter.

However, the lack of detailed consolidation measures in the MTFF and their proposed timing means that implementation prospects are highly uncertain. Revenue-raising proposals include a tax reform bill that could include adjustments to VAT and personal income tax for high earners. Congress rejected a proposal to raise $9.8 trillion COP last year, and tax reform is challenging to approve before the presidential elections scheduled for May 2026. Fitch says this casts doubt on the 1pp-of-GDP net fiscal adjustment planned for 2026, which would come solely from increased revenue.

The spending adjustment in the MTFF is not scheduled to begin until 2027, so it too is subject to election-related uncertainty. Budgetary rigidities may further increase in the medium term following the passage last year of pension reforms and legislation to increase central government transfers to the regions.

According to Fitch, deficits will remain structurally high in the absence of more concrete consolidation measures, meaning that gross general government debt-to-GDP rises in the forecast period, and is likely to exceed the Debt Dynamics Model path produced in March of 64.8% in 2028, increasing the gap to the ‘BB’ median (53.8% in 2024). Colombia has a record of passing tax reforms, but the potential for continued pre-election fiscal slippage may increase the challenge faced by the next administration in formulating and implementing a credible deficit-reduction plan when it takes office next July (with new measures potentially not taking effect until 2027).

The MTFF envisages greater market borrowing to meet higher 2025 financing needs, potentially including $2.4 billion USD of additional global bonds and more shorter-term borrowing in domestic markets, raising exposure to changes in market sentiment that could increase borrowing costs. The International Monetary Fund (IMF) suspended Colombia’s Flexible Credit Line in April, when it cited rising, above-target public deficits and debt.

Colombia President Gustavo Petro. Photo credit: Gustavo Petro/X.