Although the government of Gustavo Petro welcomes an economy growing at positive rates, the market expects it to slow down. Juana Téllez, BBVA Research’s chief economist for Colombia, spoke with Portafolio about the scenario facing the new President, and the importance of quickly defining the new tax and the nation’s general budget for 2023.
(Last big Fed rate hike would be in September: JP Morgan).
What is the diagnosis of the economy received by President Petro?
There are several important things. It receives an economy with an exceptional performance in the first part of the year, which in the post-pandemic managed to recover quickly, with consumption growing significantly, and also investment in machinery and equipment, foreign trade.
So, you receive an economy with significant growth, above 10% in the first half of the year, that is good news, but that growth also has a component that worries us all, which is a very significant growth in inflation and an increase of interest rates due to the need to control this imbalance. All this is framed in a difficult international scenario for all the world’s economies, but in particular for the emerging ones.
(The indicators that increase the fear of an economic recession).
What are the prospects for the end of 2022 and for next year?
With the international challenges and the increase in rates, we anticipate that the economy will tend to slow down in the second part of the year. We are going to see less dynamic consumption and investment… As I tell you: we are going to see a ‘healthy’ slowdown in the economy, which will allow us to make a soft landing. It will not be very deep, but it will take us to a GDP close to 7% in 2022.
This process will continue next year, with which the economy will grow around 2%. It is an economy that is very much in line with what is happening in the world, we will have a much weaker US in the coming year, a weaker Europe and weaker neighboring countries.
The Treasury Minister has spoken of the need to continue with the fiscal adjustment. How do you see the government’s efforts?
Colombia’s fiscal challenge remains immense, despite efforts. With the pandemic, the fiscal accounts deteriorated, which is why we have the challenge of maintaining fiscal stability.
The Duque Government made immense progress, and I believe that this tax reform to increase the collection that President Petro and Minister Ocampo are presenting also goes in that direction of improving the economy’s income from the treasury to improve public finances.
We are still waiting on the other side of the equation, what the spending will be like, because discussions of the 2023 budget will also begin.
(Central bankers recommend raising rates to curb inflation).
How do you perceive the government’s tax reform proposal?
Colombia collects little when compared to countries with similar income, from the OECD or the region. We have the task of achieving greater collection, most of this comes from companies, when in the rest of the world it comes from homes. That combination that we have is not adequate, because if the burden falls on the companies it has an effect on investment and labor hiring, and in that sense we must make a change.
The project that is in Congress increases the collection of people with higher incomes and there it corrects a part of the problem, but it continues to collect a lot from companies, we are still very overloaded.
Can this impact investment?
I think so. It is key that we quickly approve the reform because uncertainty can affect investment decisions in the second part of the year. Especially decisions to purchase machinery and equipment, in construction and civil works. That is why it is key that we go with a message of urgency, we try to pass the reform quickly and we know how the balance of the fiscal accounts is.
How do you see the discussion of the 2023 budget?
This institutional arrangement that we have in Colombia is not easy. The budget is presented by one government and executed by another, and the priorities are different. There are several things, there is the amount and a whole discussion about whether it can be changed or not, how that change can be made, if with an addition.
From the budget that the Duque Government presented, I was very concerned that the investment was very low. We are going to see how Minister Ocampo makes decisions regarding social spending, with the programs that end at the end of the year, and also if that combination of investment will be maintained much lower than spending. The minister is trying to manage that puzzle to reorganize the budget lines.
There is a lot of uncertainty with spending, and we will see it over time with the reform. Another issue is the management of the Fuel Price Stabilization Fund (Fepc), there is a strong discussion of how they will enter the fiscal numbers, especially to decide how the gradual increase in the price of gasoline will be. That subsidy is not ideal, and it is too costly given oil prices. It is key to avoiding additional debt increases.
Laura Lucia Becerra Elejalde
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