Colombian Peso Dives on Reports of Finance Minister Quitting

Colombia’s peso tumbled after local media reported Finance Minister Alberto Carrasquilla will quit following days of bloody street clashes and the shelving of his plan to raise taxes.

Carrasquilla and his deputy Juan Alberto Londono will hand in their resignations Monday, Blu Radio reported, without saying how it obtained the information. La Republica daily said the whole economic team that worked on the tax bill will also quit.

Local markets sold off, with the Colombian peso weakening 1.6% to 3,804 per dollar, the worst performer among more than 100 currencies tracked by Bloomberg.

The reports add to the growing sense of chaos in the Andean nation, which is seeing daily clashes between demonstrators and police, road blockades by protesting truckers and taxi drivers, striking labor unions, and intensive care units nearing capacity from a spike in Covid-19 infections.

Colombian Peso Dives on Reports of Finance Minister Quitting

Dollar bonds also fell, as the tax bill had been seen as key to defending the nation’s investment grade credit rating. The average spread of Colombian bonds over U.S. treasuries widened the most since March, according to JPMorgan indexes.

While declining to comment on the reports, Interior Minister Daniel Palacios told Blu Radio that the government will seek to reach consensus with political parties to present a new tax bill to congress. The finance ministry confirmed President Ivan Duque and Carrasquilla met this morning.

Palacios said on Twitter that parties from the government’s coalition are meeting to reach an agreement over a new reform, and that the administration will also hold discussions to listen to independent political parties and and civil groups.

Duque on Sunday said the government is ditching some of the most unpopular ideas, such as extending the value-added tax to additional goods and services. He called on lawmakers to urgently reach consensus around a new proposal to help the country climb out of a worsening fiscal hole.

The tax bill was intended to raise revenue to defend Colombia’s investment-grade credit rating and address a surge in poverty caused by the pandemic by funding social programs and providing cash transfers for its neediest citizens.

Troops Deployed

Over the weekend the government deployed troops to back up the police, as even small provincial towns saw protests. At least seventeen people have lost their lives during the demonstrations, and Bogota’s Mayor’s Office said that 41 stations of its mass transport bus system had been put out of action by vandals.

The decision to abandon the bill less than three weeks after it was introduced is another blow for Duque and undermines chances he’ll be able to pass other reforms before his term expires next year, said Sergio Guzman, director of Colombia Risk Analysis.

The government was already under pressure from days of street protests that have left at least seven people dead, as violence spread beyond the major cities to provincial towns.

Colombian Peso Dives on Reports of Finance Minister Quitting

“The government overplayed its hand with the reform, lost, and now is left in a really bad position facing the electorate,” Guzman said. “It effectively makes Duque a lame duck.”

Colombia is among the first major emerging markets to attempt to implement large tax increases to bring its ballooning debt burden back under control. Other countries in the region may face similar difficulties trying to boost revenue in economies that are still being ravaged by the pandemic, and nowhere near having recovered from last year’s slump.

Tax the Rich

A new bill should maintain measures that protect Colombia’s most vulnerable while raising taxes on the rich, Duque said. He vowed that no one will pay income tax that doesn’t already pay it.

Duque also called for a host of temporary taxes, including on corporations, the wealthy and dividends. He added that people with higher incomes should pay more and that the government needs to tighten its belt.

Investors have sold off Colombian assets since the bill’s introduction in mid-April as they increasingly price in the likelihood that the nation will be downgraded. Both Fitch Ratings and S&P Global Ratings rate the country one notch above junk.

“We are waiting to see the new plan on fiscal consolidation strategy going forward,” Fitch analyst Richard Francis said. “We always knew any reform was going to be difficult and wanted to see the final Congressional outcome.”

Moody’s Investors Service, which rates Colombia two notches above junk, said in a report that the withdrawal of the tax bill is negative for the nation’s credit outlook.

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