Mind The Gap
Fiscal results for 2016 presented few surprises aside from a slight increase in the deficit, relative to the forecast. What was surprising was an increase in income tax collection, which outperformed the COP 1.6 trillion target. But VAT collection underperformed by COP 3.4 trillion. GDP also underperformed, and the government has cut its forecast to 2% from 3%.
Reduced revenue was paired with higher spending. Expenditure increased by COP 1.3 trillion, from the Financial Plan published last June, and was up significantly from 2015. These results are discouraging, as they reveal little effort to keep the deficit in line. And it is difficult to justify a tax reform to replace oil revenue, when spending is soaring.
The main changes for 2017 seem related to tax reform. Revenue in 2017 is projected to rise by COP 6.128 trillion, increasing tax revenue to COP 129.969 trillion. Most additional revenue is expected to come from raising the VAT from 16% to 19%. It was surprising to find that pre-financing for COP 8 trillion, did not reduce any other financing source, instead, uses, different to the deficit, were increased in the same amount. This seems odd and reveals an increasing use of short term debt, which is not considered in total debt figures.
After a deterioration in external imbalances over the past several years, the government is keen to demonstrate that the worst is over. It expects the current account deficit to fall from an estimated 4.5% of GDP for 2016 to 3.6% of GDP in 2017; and to reach the pre-oil shock level of 3.3% of GDP by 2019. But financing even a small CAD is unlikely to be easy, as FDI is expected to be moderate.
The official medium term macroeconomic outlook relies on a recovery of economic activity starting in 2018, when GDP is expected to expand by 3.5%, and then to grow above potential for the next five years. These results in turn reflect a modest recovery of the oil sector, as the government expects oil prices to stabilize at $ 70 per barrel starting in 2020.
In sum, the next five years look better than the last two in terms of macroeconomic imbalances. However, the sustainability of these improvements is still questionable, and closely related to policy measures promoting fiscal discipline and boosting economic sectors other than oil. This is unlikely to happen in the next 18 months with a government that is on its way out.
Colombia is in a difficult political juncture. Despite stable presidential approval rates, the economic outlook perception is quite dire. Tax reform approval is almost at its lowest and consumption expectations are not looking good. All of this in the midst of corruption scandals plaguing the government and key cabinet members leaving in order to enter the presidential race - at a time when Colombia needs its best at the top to steer the country through 2017.
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