Colombia’s recently released Medium-Term Fiscal Framework (MTFF) utilizes optimistic economic growth assumptions and relies on one-off privatization/asset sales and uncertain administrative measures to boost revenues, says Fitch Ratings. As such, risks to achieving challenging fiscal deficit targets and to stabilizing debt dynamics, factors contributing to Colombia’s Negative Rating Outlook, remain.
The MTFF has reduced the government’s 2019 and 2020 general government deficit targets back to 2.4% and 2.2%, respectively, from 2.7% and 2.3%. However, the framework also assumes growth over the next two years to accelerate to 3.6% and 4.0% and remain above 4% over the next decade. Fitch believes this is overly optimistic. By comparison, Fitch forecasts Colombian real GDP growth to be 3.3% this year and 3.5% in 2020. The ratings firm estimates the country’s potential growth rate, a measure of the highest level of long-term sustainable growth, to be 3.5%.
In addition, Fitch believes that risks to growth are clearly weighted to the downside. Colombia posted lower-than-expected 1Q19 growth of 2.8% year over year and a decelerating global economy through 2019-2020 will add to risks that the current recovery will be weaker. Lower economic growth would undermine revenue forecasts and suggests that the current deficit targets under the MTFF will be difficult to achieve. Problematically, the revenue targets also continue to rely on one-off proceeds from privatizations and asset sales amounting to 0.6% of GDP in 2019 and 0.8% in 2020-2021.
Colombia has relied on non-recurring revenues to meet recent deficit targets including telecommunication fines in 2017 and pre-payment of taxes from Colombia’s state-controlled petroleum company Ecopetrol in 2018. Colombia’s reliance on extraordinary revenues to meet fiscal targets suggests structural challenges to tax revenue performance.
The government estimates that tax administration reforms and anti-tax evasion efforts will boost revenues by nearly 1.3% of GDP by 2023. These reforms may potentially work, but Fitch believes there is a high degree of uncertainty in accurately estimating the magnitude and timing of additional revenues that could result from these efforts.
A further challenge will come from the 2018 Financing Law that included personal income tax increases but cut corporate taxes and provided other tax incentives. Fitch expects the law to yield additional revenues in 2019 but result in a significant loss of revenues beginning in 2020. Inflexible current expenditures such as wages, pensions, transfers and interest payments, make spending adjustments difficult to achieve. The ability to cut capital expenditures is also limited as they are already quite low at 1.4% of GDP in 2018 down from 1.9% in 2017. The government also has additional spending pressures from the peace process with FARC and, separately, the large scale inflow of Venezuelan migrants and refugees.
The challenges to reduce the fiscal deficit underscore significant debt dynamics risks as well. Fitch’s base line is for debt to stabilize after this year but weak growth, fiscal underperformance, contingent liabilities and exchange rate depreciation all could threaten this. The government projects general government debt falling to 39% by 2030 from a peak of 53.5% of GDP this year.
Headline photo: A terminal in Bogotá’s El Dorado International Airport sits empty. Photo credit Loren Moss 2014