Fiscal rules, healthcare debacles and constitutional assemblies
There has been so much news in Colombia, so much of it bad, that pinning down the most striking or damaging pieces poses a challenge. To start at the top: the most frequent theme of President Gustavo Petro’s many speeches seems to be his idea for convoking a constitutional assembly. That – which he promised during his campaign not to pursue -- could have six or seven motives, from creating a smokescreen for the nearly constant scandals involving his closest associates; to diverting attention from a potential impeachment effort against him; to generating support for his struggling reform initiatives; to recovering from the painful defeats of the October 2023 local and regional elections. Governing Colombia is barely on his agenda (when there is an agenda). No, Petro has more important things to care about. Ordinary Colombians are bombarded with so much information, all day long, that it can be difficult to focus. Social media is full of opinions landing from all possible directions, while obfuscation prevails. Even one of Petro’s closest associates has (anonymously) likened the constitutional assembly idea to the explosion of the Hindenburg. Fortunately, five past presidents have stepped up to counter the idea.
This is clearly not a viable equilibrium for the next two years of the presidency. Petro’s game plan seems to be to continuously threaten the country with a dismal scenario if impeachment is pursued. Impeachment could easily take two years, and so could hardly be resolved before the end of Petro’s term. But such uncertainty makes it difficult to be a parent or a Colombian businessperson these days.
The government has been arguing that the current Fiscal Rule is not conducive to a strong economic recovery. Finance Minister Ricardo Bonilla says the FR needs more flexibility, given the economy’s current low-growth phase. Leaving aside the need for a more countercyclical fiscal policy stance Bonilla says is required -- as if 2024’s 5.3% of GDP deficit is not countercyclical enough -- different motivations lurk behind the need for a higher deficit. On the one hand, government revenues will come in below expectations in 2024, primarily due to over-optimistic 2023 economic growth assumptions, revenues from arbitrations and improved enforcement of tax evasion measures. Revenue shortfall could be as high as 1% of GDP. Then the Constitutional Court’s ruling on the non-deductibility of royalties from income taxes means the government must return 2023 tax payments to O&G companies. Meanwhile, spending has risen. We propose what we consider a more realistic scenario for 2025-2026. By 2026 we expect the national central government to run an approximately a 4% of GDP deficit (instead of 3.2%) and a net debt 59.2% of GDP. That could have repercussions on exchange rates, debt ratings and interest rate costs, which could imply even more complicated outcomes. But we think it’s important to put such simulations on the table, as we don’t see a politically realistic scenario under which the fiscal rule survives unscathed.
Just when we thought that Colombia had avoided the debacle the government calls “health reform,” the president, the Ministry of Health and the Superintendency drew an unexpected ace from their sleeve. The day after the reform proposal sank in the Senate’s 7th Commission, the Ministry of Health and the superintendency produced a document, surprisingly signed by the major insurers (the EPS) and the two business associations that represent them (ACEMI and Gestarsalud), which basically stated they are going to re-present the reform plan to Congress come August, but this time with the full support of the EPS. This is the final stab for a dying system. The previous health care system worked well, after 31 years of arduous work by many Colombians. It created 25 of the 500 best hospitals in the Americas, attracted foreign investment, weathered the COVID emergency with remarkable success and fulfilled the promise of affordable health for all, something many developed countries have been unable to attain. That system is now gone, with almost 35 million Colombians already under public provision of services (in intervened or publicly-owned EPS). Dark times loom for Colombian health care. It is a really a sad week for Colombia, and an even sadder one for Colombians.
The Petro administration’s record in the Oil & Gas industry is far from satisfactory. Oil reserves have dipped over the last three years, to 7.1 years, while gas reserves have plunged, to six years from 10. Additions have not maintained the same pace of production.
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