JP Morgan warns of new lights and shadows on Colombia’s economy

In a new update of its monitoring of Colombia’s fiscal situation, the bank JP Morgan assured that the country has been showing progress on several fronts that have been criticized in recent months, especially in the management of its income, but warns that there are pending points and that remain, such as the administration of the budgetary terms for 2024.

According to this financial institution, amid the risks which are still latent for the country due to the economic slowdown, one of the positive changes observed in the June adjustment of accounts was in tax collection, which for them broke the bad streak and although it is still lagging, it showed its first favorable result in the last three months, which means a better cash performance for the country.

“On an annual basis, real tax revenue ended a sequence of eight consecutive negative results in May, increasing by 10.1% year-on-year, driven by the accounting of income tax collections. That said, in the first five months of the year, real revenues fell by -11% year-on-year, the worst contraction on record since 2010,” they said in their report.

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Breaking down the performance of the collection, they pointed out that domestic VAT is the only category that shows a positive performance this year (+1.5% year-on-year in real terms to date), an advance that for them is taking place thanks to the greater purchasing power of households that was boosted after the correction of the minimum wage and the slowdown in inflation.

However, they are concerned that “the weakness of VAT on imports, Income tax and financial transactions have proven to be a major drag on tax revenues,” making it clear that there are still points that need to be worked on in the coming months.

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“Seasonally adjusted, total actual revenues in May showed a recovery from the 22% seasonally adjusted monthly decline in April, soaring +57.4% monthly. Most of the monthly increase was explained by income tax collections, as expected given the change in the tax payment date this year. However, despite the good performance in May, revenues are down over the last 3 months by a seasonally adjusted -13.5%,” they concluded in this regard.

While the above marks a positive trend, JP Morgan also reported that budget execution was below the historical average until June, amid a return on investment that for them remains insufficient and that for the first half of the year show that execution reached 38%, compared to 42.1% in 2023.

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“Excluding debt service, the pace of execution reached 36.6%, below the average of 38.2% in the 2000-23 period. Meanwhile, public sector capital expenditure is the category with the lowest pace of execution,” says this report from the largest bank in the United States.

Another point on which they focused their attention was the execution of investmentswhich they say registered only 22% in the aforementioned period, marking a new decline compared to 27.7% in 2023, and conclude that real spending contracted by 28% year-on-year in June. They also argue that the June correction was not sufficient to offset an increase in real spending for the quarter (+11% year-on-year in Q2 2024), nor for the year (12% year-on-year to date).

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“At the end of June, Treasury deposits at BanRep registered $11.7 billion (or 0.7% of projected GDP for 2024). The level continued to print well below the June historical average of 2.6% of GDP (2015-23 average). That said, the aforementioned recovery in tax collections helped improve Treasury liquidity from the worrying levels of early May,” they added.

Based on all of the above, JP Morgan indicated that the risks regarding the fiscal rule remain in force and that the behavior of the economy and the State’s treasury must be closely monitored, since it is not guaranteed. compliance with the fiscal rule, despite the moves made to overcome the liquidity crisis.

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“We believe that risks are still tilted towards lower revenues than anticipated in the latest fiscal reviews, which would justify an additional fiscal cut (or maintaining low budget execution). Therefore, the risk remains tilted towards the fiscal deficit being wider than our projection of -5.6% of GDP (which is in line with the government’s revised projection),” they concluded.

In another report revealed by this financial giant also The situation regarding the cost of living in the country was addressed and it was said that although the news in June provided some surprises on the upside, it is not ruled out that it will continue to fall and that inflation will end the year at levels very close to those expected by the National Government.

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“We project a further slowdown going forward, albeit at levels well above pre-pandemic averages (…) In terms of the CPI forecast, firmer food prices seen in June, coupled with currency weakness seen in June affecting producer prices, drive a slight upward revision of the headline CPI going forward,” they stressed.

That said, he focused his projections on the Bank of the Republic and said that he expects the pace of rate cuts to be maintained and that the cut at the next meeting will be 50 basis points, although he is clear in warning that The battle against inflation should not be considered won and this requires prudent decisions for the future.

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“We project the policy rate level for December 2024 at 8.5%, a level highly dependent on inflation breaking the inertia experienced in the second quarter. Indeed, it should be noted that there will be two full calendar months between the July decision and the next meeting. As for the terminal rate for the cycle, we maintain the level at 6.25%,” they concluded.

Thus, although for JP Morgan things are improving as the markets projected, this change in trend is happening more slowly than desired and therefore it is necessary to maintain efforts and Do not rule out having to make new decisions in the future if the country’s economic reality requires it.