"The fiscal situation is worrying both in terms of spending and income," says an economist. "The economy will have to pay for this." The trigger was the 40.9% plunge in tax collection in April, to US$ 4.83 billion, after which the country accumulated a shortfall of around US$ 2.85 billion in the first four months of the year.
The recent collapse of tax collection in Colombia set off alarms in financial markets and is expected to prompt the government of Gustavo Petro to announce soon how will it cover a shortfall estimated by economists at around 27 trillion pesos (US$6.99 billion) for 2024 as a whole, analysts said.
The pressing cash needs would not allow time for the adjustment to be announced in the fourth quarter, as originally projected by the Minister of Finance, Ricardo Bonilla, given the risk that the country breaches the fiscal rule and, thus, risk-rating agencies downgrade the country's sovereign at some point this year.
The trigger of the concerns was the 40.9% drop in tax collection in April, to US$ 4.83 billion, after which the country accumulated a shortfall of about US$ 2.85 billion in the first four months, compared to the government's goal for the period.
Added to this situation was the announcement by the National Tax and Customs Directorate (DIAN) that it will not be able to collect almost US$2.6 billion from tax dispute arbitrations during 2024, as well as the effects of a ruling by the Constitutional Court that repealed a provision that prohibited companies in hydrocarbons from deducting royalties paid to the government from their income taxes.
"In short, the fiscal situation is worrying both at the level of spending and income," said Andrés Abadía, chief economist for Latin America at Pantheon Macroeconomics. "The economy will have to pay for this."
Most analysts consider that the government's new plan should be announced in mid-June, as part of the medium-term fiscal framework, if it wants to avoid a confidence crisis.
It was not immediately possible to obtain comment from the Ministry of Finance.
LESS SPENDING AND MORE DEBT?
The government faces a dilemma to face the multi-billion gap, either by significantly reducing expenses, increasing debt, or a combination of both. Any option will take a toll on Latin America's fourth largest economy, which is going through a phase of deceleration, explained several analysts consulted.
Additionally, the Ministry of Finance would continue to exchange internal debt to extend maturities, experts warned.
"I am on the pessimistic side about the announcements, I think they are going to be insufficient," said Camilo Pérez, director of economic studies at the Banco de Bogotá. "Surely, the government is going to mention that part of its strategy will be an spending cut and another part is left to chance in the sense of lowering budget execution, and we believe that they are going to increase the placement of TES bonds."
But larger debt issuing would mean raising the fiscal deficit, targeted for this year at 5.3% of the Gross Domestic Product (GDP), the limit to comply with the fiscal rule.
This would eventuality generate market volatility due to uncertainty about the ability to control the imbalance, ultimately leading to a higherrisk premium and rising financing costs, explained the analysts who warned about a moderation in valuation prospects for investors.
"We have not yet fully incorporated the fiscal risk," said Mauricio Guzmán, head of investment strategy at Sura Investments, which manages a portfolio of $20.5 billion, of which $2.5 billion is concentrated in Colombian public debt.
"We know that investors are going to be very reluctant to take risk until there is a little more fiscal clarity," he added.
Sergio Olarte, chief economist for Colombia at Scotiabank, explained that a drastic cut in spending this year could slow economic growth by reducing public investment and government consumption, all combined putting pressure on 2025 finances.
"They are going to have to present a super austere budget next year or modify the fiscal rule," he warned.
