Colombia Assets Sell Off as Lawmakers Try to Block Tax Rises

Colombia’s peso suffered the biggest sell-off in emerging markets as lawmakers threaten to scupper the government’s attempt to raise taxes, increasing the chances the nation’s credit rating will be cut to junk.

The peso extended losses Tuesday and has weakened 2.3% this week, the most among emerging market currencies tracked by Bloomberg. Colombia’s dollar bonds due 2051 have slumped by more than 5 cents since mid-April to 93.1 cents on the U.S. dollar, the lowest in seven weeks, and local peso bonds also sold off.

Colombia Assets Sell Off as Lawmakers Try to Block Tax Rises

Virtually the whole of congress, from former Marxist guerrillas to President Ivan Duque’s own Democratic Center party, are opposing the government’s tax bill, making it unlikely that it can pass without its main revenue-raising measures being gutted. Even Duque’s mentor, former President Alvaro Uribe, is objecting to key proposals in the bill.

With Finance Minister Alberto Carrasquilla bereft of support, the bill is likely to be watered down to the point where it may not raise enough revenue for the country to maintain its investment grade credit rating. Colombia is currently rated one notch above junk by Fitch Ratings and S&P Global Ratings. Both agencies have said the bill is key for the country to guarantee fiscal sustainability.

The bill seeks to raise the equivalent of at least an average 1.4% of gross domestic product per year through 2031 by lifting taxes on the wealthy, expanding the number of middle class earners who pay income tax and removing some exemptions on the value added tax. It also includes cash transfers to the poorest Colombians, after the pandemic left many people unable to feed themselves properly.

The Radical Change party, the biggest in the senate after Duque’s, opposes the bill. The Liberal Party and the U Party, which sometimes vote with the government, say it would hurt the middle class by raising their taxes.

The entire leftist opposition in congress, as well as the nation’s biggest labor unions, are calling for the bill to be withdrawn, leaving the government with few defenders.

“We need to be very clear that if we don’t rapidly build a consensus acceptable to everyone in this debate, we’re going to have some difficulties,” Carrasquilla told lawmakers Tuesday, as officials seek agreement on a new text to salvage the initiative.

The economy suffered its biggest contraction on record last year, and the government estimates Colombia’s fiscal deficit will widen to more than 9% of GDP this year, up from 2.5% in 2019, before the pandemic.

Labor Unions

Leftist leader Gustavo Petro who leads early polls ahead of the 2022 presidential election, has called for protests demanding the tax bill be withdrawn. Labor unions, workers and students are scheduled to march throughout the country April 28 to protest the bill, even though the nation is currently suffering a surge in Covid-19 infections.

“The rejection by political parties and new tax reform proposals are seen quite badly by the markets,” said Sergio Olarte, an analyst at Scotiabank Colpatria. This risks “the confidence that local and foreign agents have in Colombia,” he said.

The Colombian central bank is forecast to hold its key interest rate unchanged at record low of 1.75% at its Friday policy meeting. Governor Leonardo Villar has said a fiscal adjustment is key for policy makers to continue supporting the economic recovery.

The benchmark Colcap index rallied 0.5% Tuesday, but is down 17% this year in dollar terms, making it the worst performer in the Americas.

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