Data from the first half of 2019 indicating that Colombia is on track to meet its 2019 fiscal target without one-off asset sales is a positive development, but meeting the 2020 target could be challenging, says Fitch Ratings. The risks to fiscal consolidation and to the trajectory of government debt that Fitch highlighted remain. Optimistic assumptions underlying the 2020 budget that the government announced last month point to next year’s deficit being higher than the budget without additional midyear adjustments. Additionally, economic growth risks remain weighted to the downside amid U.S.-China trade tensions and a likely slowdown in major global growth drivers.
Colombia appears likely to meet its target of 2.4% of GDP central government deficit for 2019 according to the latest fiscal data through July. The government exceeded tax revenue targets for the first seven months of 2019 by COP2.4 trillion ($726 million USD), resulting in a central government deficit equivalent to just 0.9% of GDP. Notably, they achieved this without any one-off asset sales. Fitch expected the 2018 tax reform, which included personal income tax increases and other tax incentives but cuts to corporate income taxes, to yield additional revenues this year. Stronger growth, with the economy expanding by 3% year-over-year in real terms over the first half of 2019, helped to boost revenues. Domestic demand, led by consumer spending and investment, drove growth higher, with the financial services and retail sector on the output side showing the strongest sectoral performance. Colombia’s growth is particularly notable relative to the region as a whole, with the economy performing better than most large peers in Latin America.
The firm says that while positive, the first half 2019 macro and fiscal data does not alter Fitch’s view of the risks Colombia faces in achieving its medium-term fiscal targets and stabilizing public debt dynamics, factors contributing to Colombia’s Negative Rating Outlook.
Even if the 2019 deficit target is met, Fitch still expects the general government debt to GDP ratio to rise to 43.7% in 2019 from 42.3% in 2018, in part due to the recognition of contingent liabilities (including pension costs, healthcare related and judicial sentences) and currency depreciation. The aforementioned tax reform, while boosting revenues this year, is also expected to result in a significant loss of revenues next year as the cuts to corporate tax rates and incentives for capital investments begin to have an impact. The ratings firm expects these reforms to reduce revenues by around 0.7% of GDP in 2020, although these losses could be partially offset by improvements in tax administration and electronic invoicing. The 2020 budget includes an equivalent offset in asset sales for that year but is not a permanent source of revenue and there may be execution risks associated with such sales.
The 2020 budget includes assumptions for 4% economic growth and currency appreciation. By contrast, Fitch expects real GDP growth to be 3.2%and for the currency to depreciate. Optimistic budget assumptions mean that meeting the 2.2% of GDP central government deficit target next year will likely require some form of revenue or expenditure adjustment, in addition to asset sales already being considered. Meeting the deficit target could allow for the government debt-GDP ratio to stabilize but debt reduction to narrow the divergence between Colombia’s general government debt burden and the current ‘BBB’ median of 36.3% of GDP at YE19 would require further adjustments.
The recently announced re-arming of FARC dissident rebels will not likely have a significant fiscal or growth impact, at least in the short term. However, a renewal of open-armed conflict could affect governance indicators that are already weak relative to ‘BBB’ medians.