The Year Ahead: Peace, Tax Reform, and Mild Growth
Colombian GDP grew by 3.2% in Q3 – a reasonably good result, given the economic shock. Strong domestic demand has helped compensate for falling exports. Commerce GDP was up a surprising 4.8% in Q3. Private consumption has climbed on both unusually low unemployment and a still-dynamic credit market. Commercial loans outstanding are up by a healthy 18%. Public expenditure has also kept local demand growing, at the cost of a soaring fiscal deficit. Total consumption was up 3.4%.
However, the economy continues to rely excessively on the non-tradable sector, as exports keep contracting. GDP growth is being led by consumption rather than investment, while public demand has played a disproportionately important role. This is not sustainable. Low oil prices seem here to stay (at least for now), and the government’s failure to adjust is resulting in an undesirable twin deficit scenario unseen since 2010. The currency’s excessive volatility shows that Colombia’s macroeconomic policy is losing credibility.
The current account deficit is on track to reach 6% of GDP by yearend, and the fiscal deficit is forecast at 3%. These imbalances mostly explain a 40% depreciation of the currency, at its nominal historical peak of COP 3,356 per dollar. Still, the economy may grow a not-bad 3% this year.
Next year will be tough: with luck, the economy will grow on par with this year. There will be little room for countercyclical fiscal policy; monetary policy will be tighter; and private demand will need to be adjusted, to narrow the CAD.
The Ministry of Finance’s main project in 2016 will be tax reform – a key to preserving Colombia’s investment grade. Reform will be challenging, especially in the run-up to the 2018 presidential race. But a honeymoon with Congress, resulting from a peace deal, increases the chance to get at least 1.5% of GDP more in revenue. Hopefully, the reform can also help make the tax system more efficient and progressive.
Colombia is clearly witnessing important and transformational times. We think there’s an extremely high probability that a peace deal with the FARC will be reached by March. Colombians are also likely to approve it. The real challenges will start afterward: if the special jurisdiction for peace is seen as too lenient toward guerrilla leaders; if victims feel mistreated; or if the military feel unfairly convicted of crimes committed during the conflict; implementation of the accord could come under harsh attack. So extreme care seems crucial.
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