With Colombia’s oil revenues flagging and its economy struggling to regain momentum, whoever wins its Presidential Election faces a challenge to retain the country’s investment grade credit rating, with precious little room for maneuver.
Colombians go to the polls on Sunday in an election pitting right-wing frontrunner Iván Duque against second-placed Gustavo Petro , a leftist former guerrilla and ex-mayor of Bogotá .
With several other candidates taking part, the race to replace President Juan Manuel Santos at the helm of Latin America’s fourth-largest economy will almost certainly go to a second round in June .
While Petro’s pledges to hike taxes on the rich and raise social spending have unsettled some investors, there are concerns that even Duque’s more business-friendly agenda of cutting tax rates may worsen the existing budget gap .
“If the government doesn’t show fiscal consolidation in the first six months ... Moody’s and Fitch downgrade us,” said Munir Jalil , Chief Economist at Citibank . “Investors will leave and generate a serious balance of payments problem.”
Colombia’s
USD$324 billion economy
is only tepidly recovering from a series of setbacks during Santos’ two terms.
Gross domestic product growth is projected to reach 2.7% this year from 1.8 % in 2017, but that remains below potential. Economists are concerned the recovery could be stymied if consumers are spooked, external shocks roil the economy or inflation surges.
Whoever wins the presidency faces the difficult task of pushing unpopular fiscal changes through a divided Congress— including an overhaul of the pension system—while bolstering sluggish growth.
Anything less and Colombia risks losing its investment grade , economists say, barring many foreign investors from holding its debt and driving up borrowing costs.
Foreign investment funds
are the largest holders of local public debt, with about USD$25.5 billion, or 26.4 % of the total.
Fitch
ratings
agency maintained Colombia’s BBB rating with a stable outlook this month but warned it will be tough to achieve next year’s budget deficit target of 2.4 % if additional measures are not taken. The deficit is forecast at 3.1 % this year.
In December, S&P downgraded Colombia’s credit rating to BBB-, one notch above junk, and in February Moody’s revised its outlook to negative from stable. Colombia relaxed its deficit targets on May 9, a move Moody’s said could affect its rating.
Under multi-year budget targets , the new government must still lower the fiscal deficit by 2022 to 1.5 %.
That is no easy feat given costs associated with a 2016 peace accord with Marxist FARC rebels as well as promised spending by candidates on health and education.
“The next government is, in economic terms, more important than the previous three because of the fiscal constraints we’re in,” said Hernando Zuleta, Director of Economic Development Studies at the University of the Andes .
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