An additional push that might not be enough
The External Committee (EC) held its regular meeting on April 16th, where it established a new path for reducing the deficit of the National Central Government (NGC). The changes of the path that have been taking place since 2014, can be read in one of two ways. One, the fact that the fence of the allowed fiscal balances is moved farther away time and again, could entail considering the framework of the fiscal policy conducted by NCG should not really be considered a rule. The other one, looking at the long-term structural deficit of 1% of GDP, along with the size of the external shock of the collapse of oil prices, and the kink in the structural balance adjustment for next year, could suggest that the structural goal is beyond the realm of what makes sense. We think reality lies somewhere in the middle between these two interpretations.
Two important parametric changes were agreed upon by the EC in order to modify the path. First, the government will have to go from the spot price of oil as an input for the Medium-Term Fiscal Frameworks (MTFFs) and the budgets to the long-term price of oil (known as the “4-1-4”). Second, they changed the elasticity of non-oil NCG revenues to growth from 1 to 1.15, increasing the size of the allowed deviation from the structural path. Both decisions give the next administration more leeway.
The EC is walking on a razor’s edge. Its decisions are giving the next administration more space but are making analysts increasingly disenchanted with the integrity of this institutional arrangement called the fiscal rule. The sad part of this story is that it looks increasingly likely that the next administration might submit to Congress an amendment to the law of the fiscal rule, probably moving the long-term structural deficit to a higher number, to be reached probably at some point after 2022. If our prediction proves to be accurate, such a change has to be carefully crafted and presented as part of a broad fiscal package, in order to gain the support of markets and rating agencies.
There appear to be some signs that the Colombian economy began to slowly recover after more than two years of very slow growth. During 1Q of this year, private consumption growth reached almost 3%, while public consumption grew more than 6%, showing that growth continues to be highly dependent on public sector demand. Other indicators show that economic activity may have finally entered a recovery path, although still a very mild one. First, the retail trade sector has registered growth rates above 5% during the first three months of this year, which shows an important recovery of private demand after one year of average growth rates close to zero. Second, the Consumer Confidence Index (CCI) has shown a positive evolution, reaching 1.5% in April, after an considerable deterioration that kept the index in negative turf for over 30 months.
Regarding the industrial sector, the news is more mixed. Although industrial sales recovered in March and grew positively again, industrial production fell in the same month by about 1.4% (even though adjusting by working days industrial production grew 2.9%). A full recovery of the manufacturing sector remains a daunting challenge.
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