Cut to Junk, Colombia Dispatches Finance Chief, CEOs to New York
Jose Manuel Restrepo, the finance minister of Colombia, is diplomatic when asked about the downgrades that credit-rating companies dealt his government this year. “They were just doing their job,” he says.
But he then reels off -- in a rapid-fire, somewhat defiant tone -- a laundry list of things that he says proves that Colombia is doing everything that S&P Global Ratings and Fitch Ratings, along with investors, are asking it to do to regain investment-grade status. Generate economic growth? Yes. Boost tax revenue? Yes. Address the current-account deficit? Yes.
“We are following all the things we should do to continue sending that message of trust in the economy,” he said in an interview in New York.
It’s day two of a three-day, whirlwind trip for Restrepo, who took over in May when his predecessor was ousted after a tax increase proposal triggered deadly protests in a nation ravaged by the pandemic. He was in Mexico City yesterday and will be in Washington tomorrow, and he brought along the CEOs of some of Colombia’s biggest companies -- Ecopetrol SA, Bancolombia SA, Grupo Nutresa SA-- to join in some of the meetings.
And while Restrepo says the trip was scheduled well before the downgrades started in May, it’s clear his primary goal is to shore up investor confidence after those moves. Among the points he is quick to highlight in the interview: The economy is rebounding faster than many peers -- with growth forecast to reach 6% this year after last year’s 7% contraction. More importantly, efforts to bring back the failed tax bill are on track, giving him confidence that congress will approve it by late August and wrangle a fiscal deficit expected to reach 8.6% of gross domestic product this year.
He was adamant that the policy mix Colombia has chosen in the face of the pandemic -- some short-term fiscal stimulus followed quickly by austerity and tax increases to stabilize finances -- is the right one, regardless of the recent social turmoil. Things would have been a lot worse had the government not enacted the measures it did, he said.
“We did as much as we could,” the 50-year-old Restrepo said. “And we still have to do more.”
The new tax plan should be much more palatable to everyday Colombians. For one thing, the government is ditching the more unpopular proposals that would have seen the middle class paying more. Instead, the burden will mainly fall on high earners and on corporations, Restrepo has repeated constantly.
For all Colombia’s efforts to preserve it’s investment-grade credit rating, the market’s reaction to its loss hasn’t been all that pronounced. And recent history shows the financial hit was minimal for developing nations that got cut to junk, so-called fallen angels. Brazil, Hungary and Russia saw only short-lived spikes to their borrowing costs over the past decade, with most of the damage erased within months.
Since S&P cut the country’s foreign bond rating to BB+, the country’s average spread over U.S. Treasuries has widened 30 basis points, compared with 16 basis points on average for emerging-market peers, according to data compiled by JPMorgan Chase & Co.
Meanwhile, foreign investment funds were net buyers of local Colombian public debt in the second quarter, with inflows amounting to 10.7 trillion pesos ($2.8 billion).
But before that new tax proposal is sent to Congress on July 20, Restrepo is speaking to anybody and everybody who will listen with a message: The bill that is brought forward, while it may not be as big a sea change as originally sought, will be the result of a wide consensus.
It will look to raise the average annual revenue by about 1.4% of gross domestic product, short of the government’s original plan for more than 2% of GDP.
Not only has he spoken to all political parties --lawmakers after all will need to approve the bill -- but he has traveled to different regions in the country to make sure Colombians understand the benefits.
“This is the moment to present the tax bill,” Restrepo said. “It comes with the right consensus that has been built, not only in Bogota with all the political parties, but it has been built with the regions of Colombia.”
As part of the government’s bid to raise money, it is in talks with state-oil company Ecopetrol to transfer a controlling stake in the electric utility giant known as ISA and in return get about $3.5 billion at current market value. In addition, the government plans other state-asset sales that will bring in about 0.7% of GDP in 2022.
The government will also look to add in its tax proposal ways to make it easier to sell assets seized from drug traffickers as a way to further raise revenue.
Restrepo said that the government’s tax bill will do two-thirds of the job Colombia needs to solve its fiscal problem, with the balance of the work falling to the next administration. Early polls show the former guerrilla member and senator Gustavo Petro leading before the May 2022 vote, signaling the possibility that Colombia will have a leftist leader for the first time.
Read More: Control Risks Sees 2022 Leftist Win in Colombia Amid Unrest
Colombia’s central bank held interest rates at a record low 1.75% at its June meeting, defying the regional trend of increasing borrowing costs to ward off inflation. Annual inflation stood at 3.6% in June, less than the median estimate of 3.7% in a Bloomberg survey.
The central bank would have to see inflation expectations deviating from the target of 2% to 4% before considering interest-rate increases, said Restrepo, who is a voting member of the bank’s seven-member board.
If they are “not properly anchored, of course we have to respond,” he said. He’s monitoring the situation “daily,” including the potential structural effects of roadblocks during the nationwide protests.
As Restrepo continues his good-will tour, he’s stressing that the robust and established business community, along with the nation’s strong institutions, make the country a safe place to invest.
“It is not only that we have had maybe the longest and strongest democracy in Latin America,” Restrepo said. “It is also that we are working together, the public sector and the private sector. We have built a pro-business country.”
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