Colombian Government Suspends Fiscal Rule, Opening Door To Deeper Deficit Spending

On June 15 Colombia’s Fiscal Rule Consultative Committee accepted a proposal by Minhacienda, Colombia’s Finance Ministry, to suspend the application of Colombia’s Fiscal Rule that strictly limited deficit spending, for the years 2020 and 2021.

While the government seeks to mitigate effects of the Coronavirus COVID-19 Pandemic, collapse in petroleum prices, and the global economic recession, the move also comes with the danger of a ratings downgrade leading to more expensive debt, and a possible longer term reduction in fiscal & monetary discipline on behalf of the Colombian government.

According to the government, this temporary suspension is accompanied by an explicit commitment by the national government to return to the path of medium-term deficit targets from 2022, consistent with the application of the Fiscal Rule.

The temporary suspension of the Fiscal Rule is made possible by Law 1473 for exceptional circumstances that require expansion of the flexibility afforded to the government, and cannot be addressed via alternative measures, such as the macroeconomic scenario caused by the COVID-19 Pandemic.

According to Bancolombia, “despite the fact that the application of escape clauses has been recommended by the IMF and used in other countries recently, its use in Colombia given the electoral calendar and the milestone to be met in 2020 opens a source of political uncertainty that will need to be managed property.”

“We believe that the short and medium-term concerns described constitute a risk for public debt securities, especially those of medium and long maturities. This may lead to a steepening of the yield curve higher than that foreseen in our base scenario. Thus, with a current level of 440 bps, these emerging risks could reach a range between 500 and 750 bps,” said Colombia’s largest bank in a research report.

Above photo: Colombia’s meeting of the Superior Fiscal Policy Council of the Finance Ministry where suspension of the Fiscal Rule was approved. (photo: Minhacienda)