Spending ‘squeeze’ would not be enough: new fiscal risks for Colombia

Currently, the country, according to the most recent analyzes by experts and study centers, is not going through its best economic and fiscal moment. On the one hand, the slowdown keeps important productive sectors in the red, also affecting tax collection and, with it, the income that the Government had projected for this year.

All this, added to the fact that sources such as income from litigation and the non-deductibility of royalties fell, are leading the State treasury to go through its worst moment in recent years and lead many to wonder If there is enough money to at least make it to the end of the year or the accounts will remain in the red.

The economic calculations that have been made so far in this matter suggest that, if everything that has been projected is spent, there would be at least between $9 billion and $14 billion missing to reach December, meeting all the planned expenses. by the Ministry of Finance.

The Government would lack between $10 and $14 billion in cash this year

An analysis of Corficolombiana issued a clear warning, in the sense that, although a fiscal deterioration was expected for the country, as a result of the slowdown, it apparently is advancing faster than he thought a few weeks ago and that, for example, the cuts to the expenditure made in the Financial Plan, are currently insufficient.

The first thing these analysts reviewed to make this assertion was the income flow that the country currently shows, a point at which it is worth remembering that the Dian accounts have made it clear that the collection goal is not being met, cutting the money in box that was expected for this moment.

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“The tax revenues budgeted for 2024 in the Financial Plan will be much lower than expected. The lag between the observed collection and the goal amounted to $3.6 billion in the first quarter and, if the trend continues for the remainder of the year, the Government would receive $16 billion less than expected in tax revenue. The low growth of the economy is being transferred to tax collection,” they indicated.

Additionally, they maintain that the Ministry of Finance itself recognized that it will receive at most $3.3 billion for litigation this year, instead of the $10.4 billion budgeted in the Financial Plan. However, it highlights that “the eventual temporary suspension of the fiscal effects of the Constitutional Court’s ruling on the non-deductibility of royalties could partially offset this impact, by allowing it to have $6.7 billion in addition to what was provided for in the Financial Plan. ”.

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Based on all this, from Corficolombiana They highlight that Colombia’s fiscal outlook is not the best at this moment and that we must start taking measures now, or else we could fall into an unfavorable scenario for the economy, hitting key points such as investor confidence and risk ratings.

“The Government will have to make a fiscal adjustment this additional year as anticipated in the Financial Plan, in line with what we have warned and as Fitch Ratings pointed out last week. To meet the deficit allowed this year by the Fiscal Rule, of 5.3% of GDP, we estimate that the Government must reduce its spending by $23.7 billion, or 1.3% of GDP,” they added in the report.

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Regarding how progress could be made to overcome this crisis, this group of analysts makes it clear that “part of the adjustment could not be explicit, through less execution of the General National Budget (PGN), as happened in 2023, when $7.1 billion was stopped being executed.”

That said, they maintain that the Ministry of Finance will have to include a significant reduction in its primary spending in the Medium-Term Fiscal Framework that it will present in mid-June, since if this is not done, the deficit of the Central National Government in 2024 would amount to 6.1% of GDP, 0.8 percentage points higher than that allowed by the Fiscal Rule.

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“Low economic growth and high interest rates They can generate a ‘snowball’ effect on government debt and take it on an increasing path in the coming years. Interest payments have increased significantly and in 2024 it will reach 4.4% of GDP, its highest historical level,” they explained.

As a consequence of all this, they close by saying that the risk premium has been incorporating the country’s growing fiscal risks and, in the absence of a significant adjustment in spending, they predict that in the coming months a downward revision in the sovereign rating of Colombia by Standard & Poors (S&P) or a change in the rating outlook from stable to negative by Fitch Ratings.

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In this sense, they recalled that “Colombia’s country risk premium is currently much higher than that observed in 2019, reflecting the loss of investment grade and the deterioration of the fiscal situation; Colombia’s 5-year CDS today are higher than those of peer LatAm countrieseven than those of Brazil, whose sovereign rating is lower than that of Colombia.”

Finally, they maintain that it is necessary to take care of this issue, since a higher risk premium is something that is undoubtedly transferred to the cost of financing and the weighted interest rate of the Government’s debt in 2024 will rise to 7.3% (payment of interest with respect to the debt of the previous year), which represents an increase of 200 basis points compared to 2019.

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In this context, they join the calls to initiate whatever before a process of economic reactivation, which highlights that in the short term, it can have a positive impact on public finances, although it could alter the goals of the fiscal rule. “However, without reactivation measures and with reduced potential growth, there is a risk of a “snowball” effect that would endanger the macroeconomic stability of the country.”