Knowing where the country’s economy is going at this moment and determining how harsh the consequences of the bad streak that the local economy is experiencing will be, is perhaps one of the priorities of analysts and economic study centers, given that some projections are already coming true, such as tax collection and increases in unemployment in the labor market.
For now, the factors at play are the economic slowdown, red reports from important productive sectors such as industry, and interest rates that for many are at higher levels than desired. while the Bank of the Republic warns that we must be cautious in the fight against inflation.
Economic recession PHOTO: iStock
To this we must add the liquidity crisis that the National Government faces today and which has reached such a serious point that the Ministry of Finance announced last week a spending cut in the General Budget of the Nation, taking into account that due to the slowdown there is a drop in tax collection.
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A report from Corficolombiana warns that currently In the country, two phenomena are coming together that are very risky for the economy if they come together more than they should, since they will lead finances to a scenario of over-indebtedness that would end up compromising development and possible increases in GDP in the long term.
Recession PHOTO: iStock
In what they described as a “snowball effect,” Corfi’s economic research team indicated that the increase in the interest rate on government debt and the lower potential growth of the economy are the two scourges that in this At the moment they are not helping the country and on which we must start working as soon as possible, with separate strategies for each one.
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“In the last 5 years, both primary expenditure and interest payments have increased more than the total income of the Central National Government (CNG) and nominal GDP. The above is reflected in the increase from interest payments from 2.9% of GDP in 2019 to 4.4% of GDP in 2024, its highest historical level,” they started counting.
Interest rates iStock
In simpler terms, at this moment the country is spending more than it earns and this is forcing it to resort to debt much more than it would otherwise, which is not convenient at this time when getting into debt is out of the question. more expensive than usual because of interest rates.
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“The lowest potential growth in the country, at levels of 2.5%, as a result of the low investment rate, would reduce nominal GDP growth to 6.4%, from 7.3% before the pandemic. On the other hand, Colombia’s country risk premium is currently much higher than that observed in 2019, reflecting the loss of investment grade and the deterioration of the fiscal situation; Colombia’s 5-year CDS today are higher than those of peer LatAm countries, even than those of Brazil, whose sovereign rating is lower than Colombia’s,” they indicated.
interest rates iStock
On the other hand, regarding the risk premium, they recalled that this indicator at such high levels has been transferred to the cost of financing: the weighted interest rate of the government debt in 2024 will rise to 7.3% (payment of interest compared to the debt of the previous year), which represents an increase of 200 basis points compared to 2019.
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With everything already mentioned on the table, Corfi warns that this “snowball” cannot be allowed to grow, especially at this time when the economy is not strong enough and the most important thing today is to achieve Let the production engines start, with an intelligent reactivation plan.
Economic growth Private file
“This interest rate with a nominal GDP growth of 6.4% will make the debt path as a percentage of GDP unsustainable in the medium term. In the absence of a major spending adjustment, we anticipate that a downward revision of Colombia’s sovereign rating by Standard & Poors (S&P) or a change in outlook from stable to negative by Fitch Ratings,” they said.
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In this context, they indicate that economic reactivation is also a central issue in the fiscal discussion, since they highlight that in the short term, it can have a positive impact on public finances, although it could alter the goals of the fiscal rule. In this sense, they make it clear that without reactivation measures and with reduced potential growth, the problems already mentioned will only end up complicating.
César Pabón Camacho Courtesy
A difficult fiscal outlook
Another section of Corficolombiana’s recent analysis dedicated an entire chapter to the country’s fiscal situation and there it joins the voices that indicate that the deterioration of Colombia’s fiscal situation is being greater than anticipated and that is where configuring another challenge for the economy.
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“The low growth of the economy in 2023 and the first quarter of 2024 is being transferred to tax collection. On the other hand, the income expected by the government in 2024 from litigation arbitration will be much lower than the $10.4 billion budgeted in the Financial Plan. La Dian explained that these incomes depended on Congress approving a Law that authorized the arbitration of tax, customs or exchange disputes, allowing judicial processes to be unblocked and reach payment agreements with a significant number of taxpayers,” they explained.
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With this in the debate, they give their perception regarding the items on which the Minhacienda’s scissors should be passed in the cut plan and warn that it must occur in its primary spending for 2024 and that the first official document where it must be registered is the Medium-Term Fiscal Framework, which will be presented this week. “Without this adjustment, we estimate that the CNG deficit in 2024 would amount to 6.1% of GDP, this is 0.8 percentage points higher than permitted by the Fiscal Rule.”
