Economic Policy Continuity Likely in Colombia Under President Duque but Slow Growth Still Presents Fiscal Risk
Colombians went to the ballot box last weekend, electing conservative Iván Duque as the nation’s next president, and this will lead to a continuity of economic policy from the previous administration, according to Fitch Ratings.
This continuity from the policies of President Juan Manuel Santos will extend to both the inflation-targeting and flexible exchange rate regimes, the New York-based rating agency said this week in an analysis.
Photo: President Juan Manuel Santos (right) welcomes his successor, Iván Duque (left), to the Casa de Nariño in Bogotá. (Photo credit: Presidencia de la República / Nelson Cárdenas, SIG)
“Consistent and credible macro policies are a rating strength for Colombia, and the continuation of fiscal adjustment, as per Colombia’s fiscal rule, will be important for sustaining policy credibility,” stated Fitch.
This continuity, while seen as a positive from Fitch, will not in and of itself ensure Colombia can maintain its current BBB rating, however. The path to hitting the budget deficit-to-GDP ratios mandated by the nation’s fiscal rule remain rocky.
Higher oil prices and one-time windfalls from the large telecommunication fines helped ensure the government hit its 2017 target ratio (of 3.6%) and most analysts, including Fitch Ratings, believe the 2018 figure (3.1%) can be attained.
But in 2019 (2.4%) and beyond, the picture is less clear. “Further consolidation to the 2019 target will be more difficult without additional spending or revenue measures,” stated Fitch, adding that the government will be in a better spot if oil prices remain high or rise further this year.
Duque promised corporate tax cuts on the campaign trail, however, and if that pledge is fulfilled in the short-term, it would make hitting the 2019 number more difficult. This is especially true if the nation’s GDP growth rate, which Fitch projects at 2.6% for 2018, continues to lag below its potential.
This aligns with pre-election analysis from Fitch Ratings highlighting that hitting the 2019 target would likely require spending cuts.
READ MORE: Colombia Must Control Spending to Reach 2019 Fiscal Rule Target
Additionally, the agency sees risk associated with Duque’s promise to undo aspects of the historic peace deal between the government and the Revolutionary Armed Forces of Colombia (FARC) guerrilla group.
“Heightened uncertainty regarding implementation of the peace deal could increase political polarization on this issue and affect investor confidence and, by extension, negatively risk economic growth,” stated Fitch Ratings.