Duque's Tax Reform ‘Fell Short’ of Colombia Needs, Moody's Says

(Bloomberg) -- Colombia’s tax increases that took effect last month “fall short” of what the country needed to hit its fiscal deficit targets, Moody’s Investors Service said.

The nation now faces a “challenging” fiscal outlook after the tax reform generated half as much revenue as envisioned in the original proposal, Moody’s said in a report dated Feb. 13. The ratings agency put its Baa2 rating for Colombia on negative outlook a year ago.

“Beyond 2019, the tax reform will not generate sufficient revenue to meet the fiscal deficit targets for 2020-22,” Moody’s analysts including Samar Maziad said. “Without comprehensive reform measures that tackle constraints related to Colombia’s narrow revenue base, we expect tax income to decline further through 2022 as corporate tax cuts are phased in.”

President Ivan Duque’s government is likely to need “more comprehensive measures” to comply with the fiscal rule, which sets limits on how much it can borrow, Moody’s said. Mass migration from Venezuela and the implementation of a peace deal with Marxist guerrillas will make it harder to rein in spending, according to the ratings agency.

In reply to written questions, the Finance Ministry said the government is committed to “strict” compliance with the fiscal rule targets, as shown by the freezing of 14 trillion pesos ($4.5 billion) of spending this year. The implementation of electronic billing and anti-evasion measures, and the strengthening of the tax agency will all boost revenue, while the government will also sell non-strategic assets to fund investment programs, the ministry said.

The tax reform raises income tax on high earners, while cutting the levy on corporate profits. The original proposal sent to Congress would have raised more than $4 billion this year by extending value added tax to food staples. But this was opposed in congress even Duque’s his own party, and the eventual reform is projected to raise half the revenue the government wanted.

The yield on Colombia’s dollar bonds due 2029 was little changed at 4.29 percent.

Fitch Ratings rates Colombia BBB, the second-lowest investment grade rating, while S&P rates the nation BBB-, or one notch above junk. Under the fiscal rule, Colombia has to cut the deficit to 2.4 percent of gross domestic product this year, from 3.1 percent in 2018, then gradually reduce it to 1 percent of GDP by 2027.

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