Reality bites
The new MTFF, inconsistent with keeping investment grade in place, is proposing a drastic increase in fiscal space for the next decade. The central government deficit should fall from 8.6% of GDP in 2021 to 7% in 2022, and then converge, by 2027, to deficits of 2.5%-2.7%. But we show that the “business-as-usual” scenario foresees a whopping 2 pp of GDP revenue loss -- a deep hole that will require a lot of effort to climb out from.
The current tax reform plan, expected to yield 1.2% of GDP, falls significantly short in offsetting this revenue loss – so additional levies are required. Though electronic invoicing and more tax inspectors will surely produce positive results, we think that 1.4% of GDP goes well beyond what can be reasonably expected from such efforts; 0.8% of GDP seems a more realistic assumption. That would leave central government revenues stuck at around 2019 levels. We think the fiscal strategy proposed by the MTFF is really driving fiscal numbers toward a 3.9% of GDP deficit in the long run.
Hunger may be the mother of all strikes. As the story goes, when Queen Marie Antoinette was told, during the French revolution, that the people were striking because there was no bread, she responded: “Let them eat cake.” Shortly after, her head was suddenly separated from her neck. In a less gruesome parallel, Colombia’s finance minister responded to the menace of national strikes not with cake-eating advice, but with taxes on the people -- and paid with his resignation, the demise of his tax reform plan and the loss of S&P’s and Fitch investment grade rating. Yet the deep causes of public discontent started in about 2014, when employment creation lost its momentum.
Some believe the strikes were partially masterminded from Cuba and Venezuela, to support an extreme-left 2022 presidential candidate. We think that such worries might be exaggerated, since the protests may have actually harmed the likelihood of Gustavo Petro becoming Colombia’s next president – though he’s still leading in the polls.
Colombia’s coca business has never been so large -- and its power can be as destabilizing as it was in Pablo Escobar's time. Cocaine prices seem to be booming, along with those of other commodities. While the post-pandemic commodities’ boom might be a blessing for Colombia, the similar pattern in cocaine prices may pose a serious threat to political and regional stability.
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