Colombia Must Control Spending to Reach 2019 Fiscal Rule Target, Warns Fitch Ratings

While rising government revenues will make it more likely for Colombia to hit its 2019 fiscal deficit target of 2.2% of GDP, Fitch Ratings this week issued a statement warning that officials in Bogotá must also keep spending in check to meet the goal.

Despite the austerity approach of the federal government since the price of oil dropped suddenly in late 2014, reaching the goal will “likely depend largely on reducing spending, which has been steady over the last five years,” stated the New York-based credit rating agency.

The target fiscal deficit rate of 2.2% for 2019 is the key component of the so-called “fiscal rule” that the nation has adopted over a multi-year framework.

The nation was able to hit its 2017 target of 3.6% due to above-forecast incoming revenues, but Fitch noted that this came in part due to a surprise windfall from massive telecom fines and that the hyped tax reform passed in late 2016 did not contribute as much as officials had hoped it would.

“Estimated additional revenues from the 2016 tax reform did not meet expectations, reaching just 0.4% of GDP in 2017, lower than the 0.7% of GDP originally estimated,” stated Fitch.

This means that the tax reform likely won’t be enough to close the gap for 2019 and that the incoming government — after President Juan Manuel Santos leaves office mid-year following the conclusion of his second term — will have to grapple with ways to cut spending to obey by the fiscal rule.

READ MORE: Colombian GDP Grew by Just 1.8% in 2017 – Lowest Rate Since Global Recession

There is time, however. Fitch Ratings believes that the economy will turn around this year (to 2.8% GDP growth), and that this — along with a recovering oil sector bringing in more royalties and interest expenses dropping — will allow the country to hit its fiscal deficit target of 3.1% for 2018.

But the 2019 outlook, even if crude prices remain at current levels and the economy performs as expected, still doesn’t add up without some spending cuts or another tax reform, which would prove politically difficult to enact in a climate in which many citizens will still be feeling the pinch of lower economic activity as they go to the polls to vote in both congressional and presidential elections this year.

“The new administration takes office in August,” stated Fitch Ratings. “Its first major challenge will be to present the 2019 budget, testing its commitment to meet the current fiscal rule’s targets.”

(Photo credit: U.S. Air Force / Airman 1st Class Jessica McConnell)