Colombia Faces Downgrade Risk and ‘Tax Hell’ as Bill Falls Short

(Bloomberg) -- As an opposition senator, Ivan Duque slammed Colombia’s “tax hell” of endless tweaks to the inefficient tax code, instead of an ambitious reform to put public finances on a sound footing and boost productivity.

Now, as president, having lost his first battle with congress, he looks set to sign into law a tax bill similar to the ones he used to criticize, which raises enough to patch a hole in the budget for a year, while kicking other cans down the road.

Colombia Faces Downgrade Risk and ‘Tax Hell’ as Bill Falls Short

After weeks of being shunted around congress and revised by the Finance Ministry, Duque’s tax bill is now so watered down that it may not even achieve its main goal of preventing a downgrade to the nation’s credit rating, according to Nomura Holdings. The government needs to slash the deficit to avoid breaching the so-called “fiscal rule,” which sets limits on how much it can borrow.

“A downgrade could take place within the next two years,” said Mario Castro, an analyst at Nomura in New York. “Tax revenue is not enough to meet fiscal commitments.”

The latest version of the bill would boost revenue by $2.2 billion next year, according to the Finance Ministry. The original plan would have raised $4.4 billion, mainly by extending value added tax to food staples. But Duque’s allies in congress, including his mentor, former President Alvaro Uribe, blocked the proposal, leaving Duque saddled with all the opprobrium of having tried to tax national staples like beans and rice, but none of the revenue.

Colombia Faces Downgrade Risk and ‘Tax Hell’ as Bill Falls Short

The honeymoon period of the 42-year-old lawyer, who took office in August, ended abruptly. His approval rating slumped to 27 percent last month, from 54 percent in September, according to an Invamer poll. Duque is also facing protests by students demanding more funding for public universities and fallout from an expanding corruption probe linked to a highway project.

The bill takes care of Colombia’s revenue shortfall for 2019, but fails to dispel the downgrade threat, according to Camilo Perez, head of research at Banco de Bogota. The nation will face another funding gap as soon as 2020, when tax cuts for corporations kick in, he added.

“In 2020, we are going to have a tax shortfall that ratings agencies aren’t going to like,” Perez said in a phone interview.

The latest version of the bill honors Duque’s campaign pledge to cut “asphyxiating” taxes on companies, and will also cut the levy on foreign bondholders’ profits. It boosts the taxes on salaries and dividends and re-introduces a wealth tax, on assets exceeding 5 billion pesos ($1.5 million).

The bill needs to be passed by congress to become law, and the final version may contain further changes.

Colombia last year suffered its first credit rating downgrade in 15 years, with S&P Global Ratings cutting the nation to one notch above junk, citing weak growth and the difficulty of curbing the deficit. Under the fiscal rule, Colombia has to cut the deficit to 2.4 percent of GDP next year, from 3.1 percent in 2018, then gradually reduce it to -1 percent by 2027.

A survey by Nomura during Colombia’s election campaign found that Duque was the most “market-friendly” of the presidential candidates, though this hasn’t yet translated the type of investor euphoria seen under Uribe, who presided over the biggest stock market rally in the entire world between 2002 and 2010. Colombia’s benchmark Colcap index has fallen 20 percent in dollar terms since Duque’s election win.

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