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Sovereign Rating At Risk Over Tax Reform (FT)

  • President Duque says he will present a tax reform package to congress in March with the aim of getting it approved by June. If the timetable slips, there is a danger his proposal will become mired in the country's legislative and presidential election campaigns for 2022.
  • Both Fitch and Standard & Poor's rate Colombia BBB- with a negative outlook, one notch above junk. Moody's rates Colombia Baa2, two notches above junk. If the reform fails to gain approval or is watered down, there is a high probability Colombia will be downgraded — demoted from a small group of Latin American investment-grade nations that includes Mexico, Chile and Peru.
  • "Losing investment grade status would hit Main Street Colombia, it would hit morale and dent the government's image." (BTG Pactual)
  • The government is aiming for a reform worth at least 1.5% of GDP, or $4.4bn, and will try to address Colombia's multitude of tax exemptions, which cost the state roughly $20bn a year. This is likely to meet resistance. Duque's right-wing Democratic Center party has fewer than 20% of seats in congress and needs the support of other parties. Some have already said they will not consent to a repeat of historical proposals.
  • Some analysts have played down the potential impact of a downgrade, citing an estimated capital flight of only ~$1.5bn in a country with a GDP of $291bn.
  • However, Fitch warned that a downgrade would have a knock-on effect and "would negatively affect some corporate, bank and infrastructure ratings". Furthermore, Duque will not want to go down in history as the president who steered Colombia to junk status.

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