Colombia’s peso fell further among major currencies, local media reported that Finance Minister Alberto Carrasquilla is about to step down after bloody street protests led the government to abandon its plan to raise taxes.
Carrasquilla and his deputy Juan Alberto Londono will resign this morning, according to Blu Radio, without saying how he obtained the information. The newspaper La Republica said it will also abandon all the economic team that worked on the tax bill.
Although he did not want to comment on the reports, Interior Minister Daniel Palacios told Blu Radio that the government will try to reach a consensus with political parties to introduce a new tax law in Congress. The Ministry of Finance confirmed that President Ivan Duque and Carrasquilla were meeting this morning.
President Duque said on Sunday that the government is giving up some of the most unpopular ideas, such as extending the value-added tax to additional goods and services and subjecting more people to income tax. He urged lawmakers to urgently reach a consensus on a new proposal to help the country get out of a worsening fiscal hole.
The tax bill aimed to increase revenues to defend Colombia’s investment quality credit rating and address an increase in the pandemic-induced poverty by funding social programs and providing cash transfers to its citizens more needs.
Local markets sold in the reports, with the Colombian Peso falling 1.9% to $ 3,816.15, the worst return of any major currency recorded by Bloomberg. Dollar-denominated bonds were also successful, leading the country’s average spread to widen 16 basis points, the highest in nearly a year, according to JPMorgan indices. The country’s five-year credit default swap jumped to a one-month high.
The decision to leave the bill less than three weeks after its introduction is again up to Duque and undermines the chances that he could pass other reforms before his term expires next year, Sergio Guzman said. director of Risk Analysis in Colombia. The government was already under pressure for days of street protests that have left at least six people dead.
“The government protruded its hand with reform, lost, and is now in a bad position with the electorate,” Guzman said. “It makes Duke actually a lame duck.”
Colombia is among the first major emerging markets to try to implement large tax increases to regain control of its high debt burden. Other countries in the region may face similar difficulties in trying to increase incomes in economies that are still devastated by the pandemic, and which have barely recovered from last year’s fall.
Many Latin American nations are also facing deficits that expanded during the pandemic, but unlike Brazil, Mexico, Chile and Peru, Colombia’s deficit will widen rather than narrow this year, according to forecasts. of the International Monetary Fund.
In a speech to the nation on Sunday, Duke called for Congress to quickly work out a new plan “and thus avoid financial uncertainty.”
“The reform is not a whim. Reform is essential, ”he said.
A new bill should maintain measures to protect the most vulnerable in Colombia while raising taxes on the rich, Duque said. He promised that no one would pay income taxes if he had not yet paid it.
I have asked Congress to withdraw the project submitted by @MinHacienda, And to process, urgently, a new initiative fruit of consensus, and with which we avoid financial uncertainty. The real discussion is to be able to guarantee continuity of social programs. 1/2 pic.twitter.com/kaxzjESqCo
– Iván Duc 🇨🇴 (@IvanDuque) May 2, 2021
Duke also demanded a number of temporary taxes, including corporations, the rich, and dividends. He added that people with higher incomes should pay more and that the government should deepen austerity measures.
Investors have been selling Colombian assets since the bill was introduced in mid-April, as they are increasingly priced, with the nation likely to lose investment grade status. Both Fitch Ratings and S&P Global Ratings rate the country as a notch above the rubbish.
“We are looking forward to seeing the new plan on fiscal consolidation strategy go ahead,” said Fitch analyst Richard Francis. “We always knew any reform would be difficult and we wanted to see the end result of Congress.”
Markets are expected to remain volatile in the short term, with a stronger bond yield curve and a depreciation of the peso, at least until investors see the new tax proposal, Scotiabank Colpatria analysts wrote on Sunday.
The decision to abandon the tax plan shows the weakness of the Duke government and its inability to reach consensus in the legislature, said Camilo Perez, chief analyst at the Bank of Bogota.
“Markets had already been assessing the loss of investment grade in Colombia, but today’s news confirms that scenario,” Perez said.