The weight of debt and residual growth overwhelm the Colombian economy

Colombia presents a delicate macroeconomic situation. The high official projections for 2024, of a fiscal deficit of 5.3% and an external debt of 57% of the Gross Domestic Product, keep those responsible for the Treasury under a state of tension. The road looks rocky. After the pandemic, the country carries debts, and adds to this a tax collection slightly lower than the objective that the National Tax and Customs Directorate (DIAN) had for 2023. To complete the picture, annual growth estimates, which have been classified as residual, are around 1.5% on average.

The process of adjusting to the economic storm inherited from the health crisis is not over and the collateral damage is still visible. Last year, the DIAN raised a record amount of 278.9 billion pesos. But the year-on-year increase of 13% was not enough to reach the projected goal of 290.1 ​​billion. The opposition and analysts did not take long to raise their eyebrows and open the question box regarding the Government's limitations in complying with the fiscal rule, a mechanism to maintain discipline and balance between expenses, debts and the ability to Treasury payment.

Mauricio Salazar, doctor in Economics and professor at the Javeriana University, emphasizes that although last year's collection was historic, the figures would have to be broken down to understand why it is insufficient: “Last year's portfolio had two sources. One of natural and legal income tax returns. Those were already agreed upon from the end of 2022. The part that had variations had to do mainly with VAT. That segment, due to the slowdown in economic activity, was smaller.”

In any case, the accounts do not fit. During a press conference held on Thursday to present the 2024 Financial Plan, the head of the Treasury portfolio, Ricardo Bonilla, assured that this year a tax collection of 315 billion pesos is expected. But he warned that if the economy continues to stagnate, and the collection increases in parallel with the rate of inflation, there will be a deficit of 15 trillion pesos.

A figure equivalent to the money that was expected to be collected through arbitration awards and that the Fiscal Rule Committee has already warned that it will not be able to be added to the accounts because they are “non-structural” resources. Namely: that they would not be valid in the task of complying with fiscal balance. “Finally the Government is beginning to come clean,” says the director of the Javeriana Fiscal Observatory, Oliver Pardo: “It no longer expects 15 billion for arbitration and litigation, but 10 that should not yet be accounted for. If one removes them, the fiscal rule begins to be broken, with all that additional space that the economic cycle, the oil cycle and the one-time transactions gave it.”

For Marc Hofstetter, professor of economics at the Universidad de los Andes, there is no doubt that 2024 is presented as a “tremendously challenging year on the fiscal front”: “Present a projected deficit, with some very optimistic assumptions, of 5% of GDP, one and a half points higher than last year, is a very worrying figure.” And Pardo adds: “Given the circumstances, it is necessary for the Government to consider spending cuts to guarantee the sustainability of public finances and that international markets do not punish the debt severely.”

For now, the Colombian State does not have a recipe at hand to sustain its level of spending. Tax revenues are not enough and high interest rates only obscure the horizon. For example, this 2024, according to the Financial Plan presented, 25% of tax revenue will go to paying interest on the debt: “If as a society we do not discuss whether that level of debt is too high, and I I think it is, we will be complaining year after year about the high portion of interest that we must pay as a percentage of the Government's income,” reflects Hofstetter.

Another underlying issue, which is of particular concern to risk rating agencies, is the reduced growth projections. During 2021 and 2022, the country carried notable levels of debt, but the markets and creditors breathed a certain relief when they noted that the annual GDP was growing at rates of 10.6% and 7.5%, respectively. Minister Bonilla assured that the calculations for this year place the increase at 1.5%. A forecast that led a couple of weeks ago to the decision of the US agency S&P to lower the country's credit outlook from “stable to negative.”

A percentage point and a half of growth that is insufficient to revive investment and boost employment rates, experts agree. For the economist Oliver Pardo, it must be clarified that the fiscal rule is not a manual that sets a percentage of GDP as a reference indicator, but rather a technical instrument that stipulates the factors and the way to adjust the limits depending on the situation: “It What it indicates is, under certain economic circumstances or certain single transaction accounting issues, how the rule is adjusted. Today, for example, the fiscal rule allows a little more primary deficit, the difference between income and interest expenses.”

Technically, Pardo continues, Colombia is complying. And yet, the increase in total deficit projections for 2024 does constitute an obvious alarm for investors. The situation, the expert adds, is not unsustainable, but it entails future risks: “We are more vulnerable to the arrival of another type of serious national or international event, such as another pandemic, a war or a global financial crisis that could put us on an unsustainable trajectory for the payment of public debt.”

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