In the event that the shareholders’ meeting decides to distribute profits through dividends, this distribution will be made at the head of each of the partners or shareholders in proportion to their investment.

This is how the taxation of dividends was born. For this kind of tax, three elements are taken into account:

• The status of taxpayer vis-à-vis each shareholder, i.e.:

1. If it is a natural person or illiquid succession, resident of the ordinary regime.
2. If it is a non-resident natural person.
3. If it is a foreign branch (in this case it is called a permanent establishment of a foreign company).
4. If he or shee is a natural person of the simple regime.

Everyone has a different treatment at the time of taxation.

• The tax rate

1. Rates are for resident natural persons and allowances and donations and modal donations. According to article 241 of the Tax Statute, the tax rate of the year 2022, went from zero to ten percent, by 2023 from zero to 39 percent..

1. With regards to the rate for non-residents located in countries with agreements to avoid double taxation, the agreement must be reviewed to apply the corresponding rate with the country in agreement.
   

   Attorney and tax expert Humberto Rodriguez

2. In the event that there is no double taxation agreement with other countries, the rates must be revised in accordance with the case provided for in the following articles: 242, 242-1, 245, and 246 of the Statute.
3. In the case of the foreign branch, the rate will be 20%, in accordance with article 245 of the Tax Statute. For this case it is worth noting that this rate applies to those residing in countries with which Colombia currently has no agreement to avoid double taxation.
4. In the case of a natural person of the simple taxation regime, they are only taxed at the rates corresponding to the activity that is developed, in accordance with article 908 of the tax statute.
5. In this same sense, the status of a legal entity that has issued the dividends must be taken into account, that is:
6. If it is a national company that carries out the “mega investments” referred to in articles 235-3 and 235-4 of the Tax Statute.
7. If it is a company that does not carry out “mega investments” and that is not covered by the company regime (CHC) dealt with in articles 894 to 898 of the tax statute. Or
8. In the case of dividends issued by a national company of the ordinary regime that does not carry out “mega investments” of article 235-3 but that is covered by the company regime (CHC) of articles 894 to 898 of the Tax Statute.

For questions about taxation in Colombia, please do not contact Finance Colombia! Instead, contact Rodriguez & Asoc. Bilingual tax specialists in Colombia at info@rodriguezasociados.co or click on the banner below.

This guest article is published as a courtesy to readers. Finance Colombia is a news publication and does not provide financial, legal, or tax advice. This information is provided as general news and the reader must consult is or her own counsel in order to make qualified, informed decisions. Information, rules, procedures, and laws may (and almost certainly will) change, and Finance Colombia assumes no responsibility for accuracy or timeliness of information.

]]> https://www.financecolombia.com/25075-2/ Tue, 08 Nov 2022 13:26:19 +0000 https://www.financecolombia.com/?p=25075 In this week’s Colombia business news recap:

• Tecnoglass continues to break records
• EPM postpones the bid process to finish Hidroituango for the fifth time
• Mayor McMeat and the cattle ranchers
• Emerging new restaurants
• Tax Reform has passed

I am really looking forward to the upcoming CGS 2022 mining conference coming up this week, organized by Paul Harris. I will be presenting on the investment panorama for mining technology. Also Wednesday, elsewhere in Medellín there is a breakfast where Sergio Guzmán of Colombia Risk Analysis will provide an update on President Gustavo Petro’s first 100 days.

Next week I am looking forward to the Oil & Gas summit in Bogotá the 15^th through 18^th of November.

First some good news. Tecnoglass. A sponsor of this podcast, and of Finance Colombia, but facts are facts. $201.8 million in revenue…that’s dollars, not pesos. $46.9 million dollars quarterly net income, more than double last year’s quarter. Tecnoglass’ ticker symbol is TGLS and last year moved from the NASDAQ to the New York Stock Exchange. The company is doing great things for its shareholders, for its employees, and for Colombia’s Atlantic coast.

Medellín and Bogotá tend to get all the attention, but Tecnoglass is a lighthouse a “faro” in Spanish, for the city of Barranquilla and Colombia’s entire Caribbean region.

Now, back in Medellín, Mayor Daniel Quintero-controlled EPM has postponed for the FIFTH TIME the public RFP for finishing the second half of the Hidroituango hydroelectric turbine installation project.

It’s a mess. Quintero has made enemies of the consortium, CCCI, that started the project, the labor union says he is trying to replace local contractors with Chinese firms, now President Gustavo Petro has warned that testing the turbines may risk downstream lives and has called for an evacuation, and EPM now admits that insurers don’t want to touch the second half of this project, after over a billion dollars in claims have already been paid on the project, so Quintero wanted to blow up the project and run off CCCI, now it is su própio chicharron, as they say in Spanish. It’s his crunchy mess!

Crunchy Colombian chicharrones

Speaking of delicious chicharrones, crunchy messes, and Daniel Quintero, the head of Colombia’s cattle rancher’s federation, FEDEGAN, José Félix Lafaurie has denounced the revolutionary mayor for using the city to launch an anti-beef campaign, right in the heart of Antioquia, which is Colombia’s cattle heartland.

Now we see the mayor slicing into a side of beef, Brazilian Rodizo style, while he is telling everyone else to abstain. Now, Quintero’s favorite thing is to call everyone who opposes him a tool of former President Alvaro Uribe. Yes, the head of Fedegan’s wife is Maria Fernanda Cabál, who is more Uribista than Uribe himself…but could it be Quintero himself who is being a hypocrite?

Official Medellín municipal anti-beef signs

What’s almost as bad as being a hypocrite? Being henpecked perhaps? In an interview with BLU radio, the mayor’s wife, a vegetarian activist, came out as being behind the campaign. She says she doesn’t allow red meat in her house, but that the mayor may have cravings that he takes care of in restaurants. She says “You can’t become the annoying radical…” but FEDEGAN seems to think that’s exactly what she has become.

The mayor’s wife on BLU Radio (Spanish):

Now in my humble opinion, there is nothing wrong with being a vegetarian, but there is nothing wrong with eating beef, either.

¡Vivir Sabroso! The mayor chowing down on a big beef as his wife looks on (photo: Twitter account of José Félix Lafaurie)

Speaking of beef…While we wait on the William Reed Organization that publishes the global 50 best restaurants lists, including Latin America’s 50 Best Restaurants, we have the results for restaurants 50 to 100.

Leo and  El Cielo are not on the list, which I take as reassuring, meaning that they are still in the top 50. I am really curious to see what other Colombian restaurants, if any, have made it. The top 50 list is released next week on November 15th.

Colombian restaurants on the 51 to 100 list include

• Prudencia in Bogotá
• Humo Negro in Bogotá
• X.O. in Medellín
• Harry Sasson in Bogotá
• Salvo Patria in Bogotá

I have been to Harry Sassón in Bogotá, and not only is it great, but it is a great value for a high-end restaurant. I can personally recommend it.

Bogotá’s Harry Sassón is one of Colombia’s best restaurants. (photo: Loren Moss)

As for the rest? Well I am willing to sacrifice on behalf of you dear listener, and try them out. It’s a tough job, but someone’s got to do it!

I will get started as soon as I get back from the Rum Renaissance international rum congress this Saturday and Sunday in Miami. If you will also be there, look me up! Otherwise, I hope to see you the end of the month back in Miami at the Bonds & Loans Latin American & The Caribbean event in Coconut Grove. Be sure to use discount code FC20 when you register!

Colombia’s congress passed President Petro’s tax reform act last week, which appears to hit the petroleum and coal mining sectors hard, as well as lowering the income tax floor to make more people liable for income tax in Colombia. The rate is still well above the average income for Colombian wage earners. The tax reform also adds VAT (Value Added Tax) to quite a few new food items. You can read details here, on Finance Colombia.

Don’t forget about Tecnoedificios and Cleantec show November 22 and 23 in Medellín at the Hotel Intercontinental. You can find details for this and every other event we have mentioned at financecolombia.com

Until then, be kind, be tolerant, and just as importantly, don’t be annoying!

A fiscal reform like the one put forward would face resistance in the best of times, however Ivan Duque’s administration faces discontent for his management (or lack thereof) of the COVID-19 crisis, failure to stop assassinations of ethnic advocates and social leaders and attempts to euphemize Colombia’s rising massacres by calling them “collective homicides.” His party is increasingly isolated as its leader, former President and current Senator Alvaro Uribe faces charges and investigations ranging from witness tampering and bribery to frame other senators, to human rights abuses and state-sponsored violence during Uribe’s term as President from 2000 to 2008.

Against this atmosphere, and with Colombian hospital intensive care units at or over full capacity with COVID-19 patients while health providers report that they have run out of government provided vaccines, President Duque announced his “Reforma Tributaria” or tax reform that sought to broaden the items included in Colombia’s 19% VAT (Value Added Tax) and include more of Colombia’s low-income residents in income tax collections. Those earning as low as $2.400,000 COP per month, or $673 per month next year, and then $1,700,000 COP (Colombian Pesos) in 2023 would have been liable for income tax under the plan, compared to the current minimum threshold of approximately $1,000 USD. Colombian minimum wage is currently approximately $250 USD per month.

No other political party supported Duque’s tax package, and some members of his own party even turned against him. Duque was thrown under the bus by his own political godfather Alvaro Uribe, who called it too ambitious—no doubt worried about his Centro Democratico party’s political survival in next year’s elections.

A fiscal package of some time is certainly needed as Colombia’s GDP fell by 6.8% in 2020 with millions left unemployed by the pandemic. Petroleum exports and tourism both make up significant parts of Colombia’s foreign exchange, and the global travel restrictions affected the demand for both petroleum and travel. For six months during 2020, Colombian airspace was completely closed to commercial domestic and international flights, and though hotels were technically not ordered to close, many if not most did shut down for lack of visitors. Restaurants and bars were ordered closed completely, or to offer carryout/delivery service only.

The Death Toll

According to Colombia’s Defensoria del Pueblo, the government agency responsible for protecting human & civil rights, the protests have been marred by at least 18 reported fatalities, though the actual death toll is expected to rise as data is compiled and sorted. At least 13 deaths are said to be firearms related (implying government forces), and one police fatality. 85 year-old Jesús Florez died from inhaling tear gas in the city of Pereira  The young cousin of Cali’s mayor Jorge Iván Ospina was shot in the head while protesting.  In Ibague, Tolima 19-year-old Santiago Andrés Murillo died after being shot in the belly by police forces. Police Inspector General Jorgé Ramírez Aragón confirmed his deployment to Ibagué to investigate the case.

Murillo’s girlfriend, Estefanía Silva spoke out: “During today’s strike, an active policeman shot my boyfriend, Santiago Murillo, in the chest when he was walking with a group of people on Calle 60 with Carrera 5. Please, those who have witnessed this, contact me or directly with the Prosecutor’s Office. Let’s keep fighting for our rights, they can’t kill us for claiming, let’s struggle!”

Colombian Mayors against President Duque

In Bogotá, mayor Claudia Lopez demanded that President Duque cancel his order to militarize the city by deploying army troops. In Barranquilla, mayor Jaime Pumarejo denounced police troops for turning their vests inside-out to obscure their identification badges (below tweet).

#URGENTE ? En Barranquilla la @PoliciaColombia interviene movilización con chalecos al revés lo cual impide su plena identificación, violando los procedimientos durante protestas. No queremos más muertes, @alcaldiabquilla, ¿cuál es la orden para el día de hoy? #ParoNacional3M pic.twitter.com/4JDTbkBk3G

— Comité de Solidaridad (@CSPP_) May 3, 2021

In Cartagena, Mayor William Dau joined the protests. “I am against tax reform. The people cannot be punished. If they are going to collect taxes, tax the wealthiest, not the Colombian people. No to the family basket (tax), no VAT on public services!” said Mayor Dau.

The move to close the airport was due to civil disturbances related to the nationwide protests expressing discontent with President Ivan Duque’s fiscal reform package, and broader political policies of his administration. Cali experienced some of the worst violence and looting in the country, even though it must be emphasized that most protesters were peaceful. In fact, many local politicians have denounced the behavior and provocations of the national police force, including Cali’s own mayor, who announced that his own cousin was shot in the head while protesting,

Video of the moments after the Mayor of Cali’s young cousin was shot in the head during the protests:

Video de Carolina Bohòrquez pic.twitter.com/4bgC9iYaYc

— Carolina Bohórquez (@car49655116) May 3, 2021

According to Aerocivil, the airport was closed to flights and traffic at 5pm Monday, May 3 as blocked roads outside the airport have prevented the ingress and egress of both passengers and aviation workers. Operations will be restarted, says Aerocivil, once conditions permit. Sources inside Colombian’s commercial aviation sector tell Finance Colombia that flights remain suspended as of Tuesday morning, and they have no information on a projected reopening. As far as can be ascertained, Cali is the only Colombian airport closed due to civil unrest.

Allow for extra travel time to Medellín’s airport

Passengers to and from Medellín’s José Maria Córdova international airport (MDE) were inconvenienced by the preventive closure of the tunnel providing the most direct route to the airport, requiring passengers to take the longer “old route” out of the valley, adding up to 40 minutes to travel. The closure of the tunnel was decided in an abundance of caution after rioters destroyed a toll booth in the northern suburbs of Medellín, far from routes involving airport passengers. Rioters also tore down “fotomultas” or automated traffic cameras that issue traffic tickets. The fotomultas are widely hated, not only for their inconvenience and cost to commuters, but because they are allegedly issue erroneous and even false fines, leaving innocent motorists in an administrative nightmare.

UPDATED: Aerocivil Announces Reopening of Cali Colombia’s International Airport

Photo credit: Loren Moss

The tax package seeks to require new sectors of Colombians to pay income tax, starting with those earning as low as $2.400,000 COP per month, or $673 per month next year, and then $1,700,000 COP (Colombian Pesos) in 2023. Colombian minimum wage is currently approximately $250 USD per month. Currently, Colombians who earn approximately $1,000 USD and above must pay income tax, those below are exempt.

The fiscal package also would require tighter fiscal tracking on revenues, and add Colombia’s 19% value added tax to utility services: Electricity, water, sewer and gas, for consumers in properties that are zoned “social strata 4,5,6” in Colombia’s residential social strata zoning system that rates dwellings from 1-6 based on property appraisal.

The mammoth tax package also would raise the wealth tax on millionaires, taxing up to 2% of an individual’s net worth annually, a tax hike on workers earning more than $10 million COP monthly ($2760 USD), establish a tax on plastic packaging, and increasing the tax on gasoline and diesel fuel from 5% to 19%. It would tax internet connections for consumers in social strata 3 (lower middle income), tax computers and mobile devices while Colombia struggles to connect lower income students to the internet, and promote digital literacy,  and tax funeral & cremation services, making such necessities almost 20% more expensive while Colombia’s health system is breaking under the COVID Pandemic.

Firearms and heavy weapons remain exempt from taxation, along with bottled mineral water and most soft drinks. In a “Let them eat cake” moment, Duque’s finance minister Alberto Carrasquilla in an interview defending the tax package, admitted that he had no idea how much basic staples like rice or eggs cost. “On the issue of eggs, it depends on its quality. Let’s say $1,800 COP (48 cents, US) a dozen or something like that.” A dozen eggs in Colombia costs an average of approximately $8,000 COP ($2.20 USD), though that price may fluctuate widely based on grade, packaging and purchase channel.

This led to intense ridicule of the finance minister, the unpopular president, and the presented tax reform package, painted as being designed by incompetent elites with no connection to the reality of average Colombians.  The protests along with an almost unanimously negative reception of the package outside President Duque’s own party will certainly leave the Centro Democratico party of President Duque, Minister Carrasquilla, and their political patron, senator and former President Alvaro Uribe, severely damaged and lacking credibility heading into next year’s presidential elections.

Uribe’s party has yet to choose a candidate, but a movement within the party has emerged promoting former President Uribe’s son, Tomas Uribe. It is hard to imagine Uribe gaining much support outside his father’s political party. Colombia has never elected a radical leftist candidate, but some worry (while others hope) that 2022 may be the year of former revolutionary and current Senator Gustavo Petro. Petro had been a member of the violent revolutionary group M-19 in the 1980s, but more recently, Mayor of Bogotá from 2012-2015, with his term briefly interrupted as he was removed from office in December 2013 for alleged illegal decrees and mismanagement.

Above photo: Twittter @Giovasummer

In summary there are over 50 recommendations however are a few that jump out to both myself and the local press. Some are very much general whilst others are in more detail.

• That the reform should be ‘fundamental’ as opposed to making adjustments in every facet of the tax code – traditionally Governments have gone for micro solutions.
• Widen the tax base for individuals, including taxing pension contributions etc – it sounds so obvious to tax more people at source but it is a subject that has been proposed, danced around and eventually thrown out. There is a reluctance to be the administration that makes this move.
• Eliminate some of the corporate exemptions and also the municipal ICA tax – the ICA tax always confuses and is simply another layer to understand, simplification has to be a key. 
• Make VAT a global tax on all but a few products – this would surely have to be balanced by more VAT compensation payments to the most needy.
• Increase the tax on goods that are harmful to health – this has worked well on reducing cigarette smoking, one area of tough debate last time around in Congress was sugary drinks, it was proposed and defeated due to local interests. 
• Removal of the 4/1000 financial transactions tax – this has been proposed before as removal or reduction but never happened. This tax was implemented on a temporary basis back in 1998 – it comes complete with the local saying “Nothing is more permanent than a temporary tax”.
• The Tax Free Zones need to be moved to a normal VAT regime – created to encourage international trade they are now open to local businesses which wasn’t the initial aim. 

There are many more proposals but the overall theme is a more just system, more people contributing, more transparency and less loopholes. The Technical Secretary of the OECD, Bert Brys, put it in simple terms :

“Colombia’s tax system is not aligned with international best practices. The country suffers from a large fiscal deficit and this will have to be adjusted in a balanced way”.

Finance Colombia is pleased to offer a new opinion column by Rupert Stebbings. All opinions are those of the contributor.

In comparison with the OECD Colombia’s tax collection is low – at 19.3% of GDP it falls below Latam (23%) and well below the OECD average of 33.8%. Another issue is the high proportion (54%) of the tax collection which comes from the corporate sector.

FinMin Carrasquilla stated that he is looking forward to a debate in Congress next week – looking at the fuller list of proposals and given the politicians historical track record of watering down any reform, it may be a good watch. 

——————————————————————————————————-

This will not be the only bill delivered to Congress. After a lengthy delay, caused in large part by the pandemic the Capital Markets Bill is also up for discussion.

The element of this that has captured the headlines is the expansion of competition when it comes to Pensions. Firstly, it appears that more financial institutions, such as brokers, will be able to offer pension funds – Colombia until a few years ago had 6 pension funds but that has fallen to four and this would help with the current concentration. Secondly the bill aims to change the fee structure into two elements. A fixed fee and then a variable fee based on performance – again this would be welcomed by consumers.

Another key aim, it appears, is to encourage fund managers to take more risk in order to increase returns for investors – the Capital Markets Commission in 2019 mentioned on several occasions that Colombia was a risk adverse environment.

There are many aspects to this bill which will need a lot of analysis by the market – however the fact that the experts have realized that change is necessary is a step in the right direction.

————————————————————————————————————–

Of course the tax reform is not the only challenge that Colombia faces economically – it is key for the Ratings Agencies however there are choppy waters ahead in many aspects.

New Central Bank Director Bibiana Taboada speaking ahead of her first meeting later this month discussed the complicated situation when it comes to rates. Inflation is well under control in Colombia – expectations are rising as per many countries as the pandemic slowly passes – but versus historic levels it remains very low. That would theoretically leave space for a further cut to overnight rates from the current 1.75% – however Taboada fears that could impact overseas investment into the market.

There has historically been a healthy carry-trade into Colombia and once again there is a healthy spread. However, with the US 10 Year expected to move above 2% in the medium term and TES benchmark rates already low – there is a fear that a further compression of the spread versus overseas rates could lead to a repatriation of bond funds.

Currently the demand for Colombian bonds seems to be in a healthy state given the swap carried out earlier this week. The Government swapped US$1.2bn of 2022 TES bonds for index linked bonds dated between 2029 and 2037.

The other question is whether moving rates from 1.75%-1.50% would make a difference in a market that has been enjoying record low rates for over a year, are there still parts of the economy who haven’t already jumped in ? The next CenBank meeting is on March 26 – at the last gathering the vote was 5-2, let’s see if there are further moves towards a dovish stance.

————————————————————————————————————–

Finally for this week – at the beginning of this week I talked about the fears of another Covid lock-down if there is over-confidence, as per Christmas, during the Easter holidays. Last weekend we got ourselves below 100 with the hope of staying there. This week the Government announced the country had now put 1 million vaccines into arms – slow but sure if we are generous – however whilst that is a low number, it is leading to a sense of complacency, here is another set of numbers :

85-92-96-97-100-125-130-138

Those are the Covid death numbers over the past 8 days – hopefully only a blip.

The governor briefed the participants on the main conclusions of the Global Economic Meeting, the teleconference convened by the global Bank for International Settlements (above photo). In the conference, the world’s major and emerging market central banks shared insight into the current development and status of their economies at the present juncture, where they have focused attention and resources, and the coordination mechanisms they have been adopting.

After analyzing the available information, the Colombian financial authorities concluded that:

1. The fundamentals of the Colombian economy remain strong and allow to absorb the external shocks herein described without severe effects on real activity and financial stability.
2. The financial system exhibits adequate solvency, liquidity, and risk management indicators, and is capable of absorbing significant market risk, liquidity, and credit shocks, which are permanently being simulated by the Committee for the Coordination and Follow-Up of the Financial System.
3. Global conditions have deteriorated rapidly, and the exchange rate is responding as expected to these changes.
4. The following fronts will be monitored continuously: liquidity and volatility of the foreign exchange market; conditions of domestic and external liquidity; and possible fiscal implications.
5. The authorities will adopt appropriate actions in a coordinated manner; decisions will be announced jointly and in a timely manner.

Despite these reassurances, Colombia is in a precarious financial situation. The government is in danger of not collecting adequate resources after passing its Fiscal Reform Law. Now, with the Coronavirus dampening international travel and tourism, a major sector for Colombia, and a new trade war between Russia and the Saudis that saw oil prices plunge 30% overnight, Colombia has few shields to defend itself against the worsening geo-financial situation. Its currency in the past week fallen to record lows against the dollar.

Despite attempts at reassurances, it remains to be seen whether the administration and central bankers can navigate the worsening situation, especially has President Ivan Duque has run low on political capital after widespread protests at the end of 2019.

In a report issued yesterday, New York-based credit rating agency Fitch Ratings said that “Colombia’s creditworthiness could be pressured” if low growth remains the norm at the same time that high fiscal deficits undermine the government’s push to first stabilize, and eventually reduce, the nation’s debt burden.

Fitch Ratings, which improved its outlook for Colombia’s ratings from negative to stable in March, has dropped its full-year 2017 forecast for the Andean nation’s economy down from 2.3% GDP growth to just 2.0%.

Fitch points to both low oil revenue and the slow execution of Colombia’s enormous 4G highway overhaul program as reasons why economic growth is failing to hit projections. First quarter expansion came in at a disappointing 1.1%, and various analysts at the central bank, private financial institutions, and research firms alike have expressed pessimism about soon-to-be-released figures for the second quarter.

Fitch’s said that its projection of 3.2% GDP growth in 2018 remains unchanged, however, highlighting that the current hurdles are not cause for full-blown panic. “Monetary easing currently underway will likely boost domestic demand, infrastructure bottlenecks are likely to be resolved beginning in the second half of 2017, and oil production should stabilize,” said Fitch Ratings.

The administration of President Juan Manual Santos has placed a priority on retaining its rating. Last year, after both Fitch and Standard & Poor’s issued concerns about long-term fiscal concerns that could lead to a downgrade, the government worked to pass a tax reform that would help shore up a budget that has been been hammered by the loss of oil revenues since the price of crude began to plummet in late 2014.

In discussing the nation’s rating last year before the reform was finalized, Finance Minister Mauricio Cárdenas told Bloomberg that “this is something we’re going to preserve, and we’re going to introduce all the decisions that are necessary to keep our BBB rating.”

Since the reform, Fitch Ratings has improved Colombia’s ratings outlook from negative to stable. But Standard & Poor’s most recent assessment, issued in January, maintained a negative outlook despite the tax reform already having gone into effect.

In its assessment released yesterday, Fitch Ratings also raised its projection for Colombia’s fiscal deficit rate. The agency now expects the fiscal deficit to reach 3.1% of GDP next year, an increase from its earlier forecast of 2.7%. This strain will be compounded by the country’s debt-to-GDP ratio. The big three rating agency had expected that figure to start to fall in 2018, but its revised assessment now predicts the ratio to merely stabilize next year.

“The changed fiscal targets do not jeopardize the overall trend toward reducing the debt burden in the medium term, but they do highlight risks of fiscal slippage,” said Fitch while highlighting that Colombia’s gross debt burden of nearly 50% of GDP is “nearly 10 percentage points higher than the BBB median.”

Colombia’s main strategy to reel in its fiscal deficit has been cutting expenditures rather than planning for higher incoming revenue. But this could prove difficult given that any strategic financial plans could be disrupted within 12 months as the nation will hold both a presidential and congressional election in the first half of 2018.

The departure of President Santos, whose second and final term in office ends next year, also means that spending initiatives related to Colombia’s peace deal with FARC could be altered, especially if a conservative-leaning head of state hostile to the accord takes office.

Still, fiscal discipline will be required if the federal government wants to hit its target fiscal deficit of 2.2% of GDP by 2019, a figure that is almost a full percentage point below Fitch’s new projection for 2018. “The nearly 1% of GDP adjustment needed to reach the 2019 target is ambitious without additional tax revenue measures and relies on additional spending cuts and anti-tax evasion measures earned by beefing up the tax authority’s capacities,” stated Fitch. This same sentiment applies in relation to Colombia’s hope to get its fiscal deficit down to 1% of GPD by 2022.

Photo credit: Fitch Ratings

Transparency International released its annual “Corruption Perceptions Index” today and it revealed that Colombia’s score has remained unchanged for three straight years. Going back further to 2012, over the past five versions of the analysis, the country has improved by a single point.

Its score of 37 on a 100-point scale (with 100 being perfectly uncorrupt) puts Colombia 90th out of 176 nations studied. Though 90th puts it around the middle of the rankings, the Berlin-based nonprofit notes that “anything below” an overall score of 50 “indicates governments are failing to tackle corruption.”

While not referencing the Colombian situation specifically, Transparency International listed the typical characteristics of nations that show such low corruption scores. “The lower-ranked countries in our index are plagued by untrustworthy and badly functioning public institutions like the police and judiciary,” wrote the organization.

“Even where anti-corruption laws are on the books, in practice they’re often skirted or ignored,” it continued. “People frequently face situations of bribery and extortion, rely on basic services that have been undermined by the misappropriation of funds, and confront official indifference when seeking redress from authorities that are on the take.”

Colombia Didn’t Regress

Though its score remains highly troubling, there is some mildly positive news to take away from the findings: Colombia is among the nations that did not regress in 2016. “More countries declined than improved in this year’s results, showing the urgent need for committed action to thwart corruption,” wrote Transparency International.

Colombia also remains ahead of many of its Latin American peers. Colombia’s 90th-place rank puts it in front of Argentina (95th), Peru (101st), Bolivia (113th), Dominican Republic (120th), Ecuador (120th), Mexico (123rd), and Venezuela (166th). It is notable, however, that the overall score differential between Colombia and all these listed nations (except for Venezuela, which received a scored of 17) was no more than seven points.

Moreover, the region does have two pillars of corruption fighting that cast a shadow over the rest of Latin America, according to the nonprofit. Uruguay finished 21st overall with a score of 71, and Chile was not far behind at 24th with a score of 66.

The top five countries in the study — Denmark (90), New Zealand (90), Finland (89), Sweden (88), and Switzerland (86) — all scored 86 or better. Canada led the Americas at 82, just ahead of the United States at 81.

Tangible Progress in Latin America

Transparency International did highlight two major revelations over the past year that illustrate the progress taking place in Latin America. “It is not always bad to have headlines about corruption,” stated the organization. “From the Panama Papers in April to the record US$3.5 billion Odebrecht settlement in Brazil in December, 2016 was a good year in the fight against corruption in the Americas. But there is still a long way to go.”

As 2016 came to a close, and again in early 2017, Colombia’s leadership has decried corruption. It repeatedly sold its unpopular tax reform, which raised rates just days before Christmas, by highlighting the included measures to fight tax evaders and improve vigilance against those profiting illicitly. The problem of Colombians shielding money overseas, in manners similar to those revealed by the Panama Papers, remains widespread.

Then, just this week, President Juan Manuel Santos signed an order, the Declaration for the Open State, to improve public sector transparency and curb abuses in government contracting. He also sanctioned a law establishing a new code of ethics for congress members, and both actions came after the nation established its Citizen’s Commission to Fight Corruption.

In announcing the new plans, the president also noted that,last week, a judge convicted nine former public tax collection officials at DIAN for embezzling tax refunds.

This follows earlier action to detain the two former public servants accused of taking the bulk of the $11.5 million USD in bribes that Brazilian firm Odebrecht admitted to paying to win infrastructure contracts in Colombia. Former senator Otto Nicolás Bula Bula denied the charges. Former transportation official Gabriel García Morales pleaded guilty.

Such actions, as well as the sweeping investigations that brought down Odebrecht and uncovered the Panama Papers, are welcome by Transparency International. But the group maintains that if Latin America wants to truly get beyond its chronic corruption, it must continue the fight.

“Even if 2016 marks the start of a shift towards more active enforcement by authorities in response to these public demands, there is still a long way to go,” stated the organization.

This figure was below both market expectations of -5.3% and the forecast of Colombia’s largest bank Bancolombia, which had predicted the index to be -6.9% for the month.

“With this result, the CCI closed a calendar year in which it remained permanently in negative territory, a behavior that the indicator had not experienced in previous history,” wrote Bancolombia in a note to investors. “In fact, after reaching 1.1% in December of 2015, the index fell sharply in January last year (-21.3%). From this point it recovered to -2.1% in September 2016.”

Four of the five cities surveyed had a negative CCI balance. Barranquilla is the lone exception at positive 2.3%. Bucaramanga is the most negative at -19.3% while Colombia’s two largest cities — Medellín at -16.1% and Bogotá at -12.0% — are also both into the double digits. Cali sits at -3.0%.

After showing recovery throughout the first three quarters of the year, Colombia’s consumer confidence again began to fall. As a cause, analysts at Bancolombia have listed the political climate and uncertainty of the October 2 plebiscite in which Colombians rejected a peace deal with the Revolutionary Armed Forces of Colombia (FARC). The ongoing debate about the tax reform that ultimately passed Congress in the final days of the year also shook the public faith.

The largest concern in the minds of consumers in December was their expectation for the economy in 2017. The tax reform raised the nation’s value-added tax from 16% to 19%, and many Colombians — including everyday people, small business owners, and CEOs alike — are worried about the effect that this increase, among other tax code changes, will have on an already slow-growing economy.

Respondents did register an uptick in December in their willingness to buy durable goods, including furniture and appliances, however. This coincided with an increase in people’s willingness to purchase housing in Medellín, Cali, and Barranquilla. But this was not a viewpoint shared across the country. In Bogotá and Bucaramanga, the willingness to buy a house fell significantly and brought the nationwide indicator into the negative.

“This report highlights the challenging environment that Colombian consumers are experiencing, which not only validates the slowdown in domestic demand observed in the third quarter of 2016 but also leads us to predict that it’s extended to the fourth quarter and the beginning of 2017,” wrote Bancolombia.