Macro Matters GlobalMarkets.bnpparibas
added tax (VAT) duties – which alone accounted for 6pp of GDP in 2017, according to the tax
collection agency (DIAN), and mostly benefits higher income households.
Duque also plans to widen the tax base by reducing the minimum threshold of income tax
collection. The reduction of the lower bound by one minimum wage (to around 3.7 minimum
wages from the current 4.7) has the potential to bring in additional revenue of around 0.3pp of
GDP, in our estimates. Carrasquilla has floated a threshold closer to 2 minimum salaries, but is
likely to face stiff opposition – Duque’s coalition, for instance, already lost a large party, due at
least partly to fear of an unpopular reform (as the 2016 Santos bill proved to be).
How much revenue will the government lose due to tax reduction In our estimates, with each
point reduction to the country’s corporate standard tax, government revenues shrink by 0.1pp of
GDP. This means that, a reduction of the corporate standard tax to 28%, implying a 0.45pp
impact on public sector accounts, could be balanced off by measures that reduce subsidies,
widen the tax base and tighten some discretionary items in the budget.
During campaigning, Duque’s team had proposed to loosen the fiscal rule, but has since vowed
to keep it intact, In our view, the new administration is already likely to start to tighten the belts
on expenditures this year, as it plans a 1pp saving spending on capital expenditures. With
investment already down to 2.5% of GDP (from 3.5% two years ago), we think a more realistic
number is closer to 0.5pp, as planned in this year’s budget.
An immediate reduction in the costs of the pension system is possible, but will also face political
opposition. Currently, half of the 5pp of GDP spent on pensions goes to the
prima media
system, which heavily subsidises higher pensions. Duque vowed to reduce or even eliminate
grants to richer families, which could already lead to annual savings of 0.5pp of GDP in the first
year, according to CGIP. He has also promised not to raise the minimum age for retirement, a
measure needed for longer term sustainability of the country’s pensions system.
All told, the country’s fiscal rule implies a downward trajectory of debt-to-GDP ratio (see
Colombia’s fiscal rule: Looser pants, flatter waistline
). In this context, we expect the country to
keep its investment-grade rating,
if
it follows the path implied in the current fiscal rule. Our “fair”
rating model puts Colombia comfortably at BBB, considering the scenario (see below).
Debt levels have risen sharply with about 27% held by foreigners (see our Strategy team’s
Colombia monitor: Pension funds switching to fixed income
), while short-term debt is still high
among corporates. Colombia’s new government faces an uphill task as spending pressures
mount and given its platform built on tax reductions, although the first signs are that the
government is moving cautiously.
Infochart 2: Simulation of Colombia’s “fair” sovereign rating
SSovereign Rating Simulator: Results
Weights0.60.4Weights0.30.40.3。