What Jumps Out: Band-Aid (or, Colombia’s Dire Economic Straits Need A Bit More)

The world has been watching this week as Colombia does its best impression of a country divided. Images have been scattered all over the world. There is right and there is wrong, there is real news and fake news – but none of it reflects well on Colombia.

Finance Minister (Alberto) Carrasquilla is no longer the Finance Minister and has been replaced by the Minister of Commerce Jose Manuel Restrepo, who appears to be ‘on message’ immediately saying that will be no extra taxes that affect the middle and lower classes – that effectively takes out VAT increase and an expansion of the tax base.

That is not going to do the trick, especially in the case of the tax base: This is the third time such a proposal has been withdrawn because of political motivations, but it is a move that eventually has to be made, a country can’t sustain itself with so few paying taxes at source. The problem is that in this instance the additional VAT charges were going to make such a change overtly painful, especially for the middle-income group. This tax base component should be moving ahead – within the OECD Colombia has about the biggest headline corporate tax rate and about the lowest contribution from individuals; that isn’t sustainable. Once again, we are heading for a ‘Band Aid’ solution as opposed to the structural change that the Colombian tax code requires.

Rupert’s opinions & analysis as an independent expert contributor are his own and not necessarily those of Finance Colombia or the BVC.

Again, setting aside the fact that most of those protesting have several other complaints beyond the tax reform, much of the problem has been optics and messaging. The issue now is that having stirred up a hornet’s nest, the government will need to find a solution using the traditional source of most taxes: corporations and the wealthy. There won’t be a lot of sympathy for the second group, nor for the first in reality, but the companies already pay their fair share and further burdening them won’t help the recovery. This time around it may not be headline rates but the removal of subsidies, however it adds up, to the same in the end.

The social uprising (is that too melodramatic?) is being handled with 10 days of meetings involving most everybody in the country. To that end the protesters, the vast majority of whom have been peaceful, have gotten their way. The key is that they are not just listened to, but that action is taken. One of the complaints of those currently on the street is that during the protests of 2019 the same ‘dialogues’ were held, promises made…and nothing happened.

Against the backdrop of the images we have seen, it appears almost churlish to discuss Colombia’s investment grade credit rating, however its removal would have more effect on those protesting than most of them could imagine. For that reason, it is vital—beyond vital—to get a tax reform penned and passed ASAP. The country economically is in a financial hole and cannot afford more lost working days, infrastructure damage or a further loss of confidence.

COVID has ravaged the country, vaccination levels are near the back of the pack, even in LatAm, and people are understandably frustrated by the situation, but the country has to move forward, and the tax reform needs to be re-submitted in an acceptable form in order for that to be achieved. The longer the debate goes on, the further the damage will be. The new cross-bench group who will look at proposals needs to complete their work without delay; ideally something simple so as to avoid lengthy debate. Middle- and low-Income groups need to be made comfortable, frankly whatever it takes to bring some calm, if only because coming down the road are other reforms including the health sector…and there have been plenty of banners to be seen objecting to that process.

Recent macro data has been solid with retail sales and industrial production beating expectations, Confidence levels inching up, and unemployment, while too high, coming down steadily. But all this could be derailed if the government doesn’t work speedily. Both foreigners reading the press and locals looking out of the windows will be equally reluctant to invest if the current situation continues. Inflation edged up in April to 1.95%, no reason to panic but roadblocks over any period of time will only push it higher as goods fail to reach the market.

Finance Minister Restrepo has publicly stated that there is no reason for Colombia to lose its investment grade and that he will be fighting to make that the case. That needs to represent 99% of his priority list right now.

In the markets the COLCAP took a leg down on Monday, as did the Peso. We also have seen benchmark 2024 bonds move from 4.35% to a high of 4.89% since the end of last week. All of these have created trading opportunities with all three products having stabilized and have now recovered some of the losses, but the strength of that recovery will now be proportional to improvement in the situation.

These are going to be long days in Colombia but as ever it is darkest before the dawn.

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That is about it for today. Remember these are just themes that jump out at me. Please refer to your local analyst, economist, salesperson or soothsayer for more details.

My regards to all,

Roops

Above image provided by Rupert Stebbings