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JPMorgan On Colombian Economy/Petro Agenda

COLOMBIA
  • JPMorgan continue to believe the medium-term outlook for COP and TES is going to be challenging. Colombia has a high fiscal deficit relative to EM peers, and the better performance observed versus expectations has been driven by growth momentum, which may be challenged by uncertainty over Petro’s agenda.
  • Also concerning is the structural current account deficit despite improving oil prices, as imports have materially increased, and the financing of which depends on portfolio flows, highlighting the risk of sudden stop if confidence is not carefully nurtured. As uncertainty remains high, particularly over the direction of the hydrocarbons sector, the traditional FDI portion financing of the current account deficit might be endangered too.
  • Colombia’s debt challenges require either ongoing very strong growth and/or structural reforms that the current administration has been unable to deliver. While JPM are pleasantly surprised that the incoming economic team seems to want to prioritize a structural tax reform as their first legislative initiative, this will not be easy to achieve, while expectations around ambitious spending initiatives may be hard to contain.
  • Petro’s comments during the campaign about social goals for BanRep are an important concern as well, and the president-elect may continue to use the bully pulpit to put political pressure on BanRep even if he will have limited capacity to change the institutional framework or the board’s composition any time soon.
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  • JPMorgan continue to believe the medium-term outlook for COP and TES is going to be challenging. Colombia has a high fiscal deficit relative to EM peers, and the better performance observed versus expectations has been driven by growth momentum, which may be challenged by uncertainty over Petro’s agenda.
  • Also concerning is the structural current account deficit despite improving oil prices, as imports have materially increased, and the financing of which depends on portfolio flows, highlighting the risk of sudden stop if confidence is not carefully nurtured. As uncertainty remains high, particularly over the direction of the hydrocarbons sector, the traditional FDI portion financing of the current account deficit might be endangered too.
  • Colombia’s debt challenges require either ongoing very strong growth and/or structural reforms that the current administration has been unable to deliver. While JPM are pleasantly surprised that the incoming economic team seems to want to prioritize a structural tax reform as their first legislative initiative, this will not be easy to achieve, while expectations around ambitious spending initiatives may be hard to contain.
  • Petro’s comments during the campaign about social goals for BanRep are an important concern as well, and the president-elect may continue to use the bully pulpit to put political pressure on BanRep even if he will have limited capacity to change the institutional framework or the board’s composition any time soon.