Colombia’s weight has fallen among major currencies the most, with local media on the verge of resigning Finance Minister Alberto Carrasquilla because of bloody street protests as the government has given up plans to raise taxes.
Carrasquilla and his MP Juan Alberto London will resign this morning, Blu Radio reported, without saying how he got the information. The newspaper La Republica has said it will also leave the entire economic group that worked on the tax bill.
While refusing to comment on the reports, Interior Minister Daniel Palacios told Blu Radio that the government will seek consensus with political parties to present the new tax bill to Congress. The Ministry of Finance has confirmed that President Ivan Duque and Carrasquilla met this morning.
President Duque said on Sunday that the government is rejecting unfamiliar ideas, such as extending value-added tax on additional goods and services and making more people dependent on income tax. He called on lawmakers to help get the country out of the wrong fiscal hole around a new proposal for urgent consensus.
The tax bill was intended to raise revenue in Colombia to defend the credit rating of the investment level and address the rising poverty caused by the pandemic, funding social programs and providing money transfers to the poorest citizens.
Local markets ran out of reports, and the Colombian peso rose 1.9% to $ 3,816.15 per dollar, the worst yield among Bloomberg’s major currencies. Dollar-denominated bonds were also successful, with the country’s average spread rising by 16 points, the most by almost a year, according to JPMorgan indices. The country’s default five-year credit swap rose to a one-month high.
The decision to file and cancel the bill in less than three weeks is another blow to Duque and reduces the chances of overcoming other reforms before the end of his term next year, said Sergio Guzman, director of Risk Analysis at Colombia. The government was under pressure during the days of street protests that left at least six people dead.
“The government overlapped with the reform, it lost, and now it is in a very bad situation looking at the voters,” Guzman said. “It makes the Duke a lame duck effectively.”
Colombia is one of the first major markets to try to implement large tax increases to regain control of its debt burden. Other countries in the region may face similar difficulties in trying to boost incomes in economies that are still ravaged by pandemics, and where they have not recovered from last year’s downturn.
Many Latin American nations are suffering from the pandemic-widening deficits, but unlike Brazil, Mexico, Chile and Peru, this year the Colombian deficit will widen rather than narrow, according to International Monetary Fund forecasts.
Speaking to the nation on Sunday, the Duke called on Congress to quickly complete a new plan “and thus avoid financial uncertainty.”
“Reform is not a whim. Reform is mandatory, ”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 the unpaid income tax.
I have asked Congress to withdraw the submitted bill @MinHacienda, and urgently process a new initiative born of consensus, with which we avoid financial uncertainty. The real discussion is being able to ensure the continuity of social programs. 1/2 pic.twitter.com/kaxzjESqCo
– Iván Duque 🇨🇴 (@IvanDuque) May 2, 2021
The duke also demanded temporary taxes, including from corporations, the wealthy, and dividends. He added that people with high incomes should pay more and the government should go deeper into austerity measures.
Investors have been selling Colombian assets since the bill was introduced in mid-April, as they are priced higher to allow the country to lose its level of investment. Both Fitch Ratings and S&P Global Ratings place the country above rubbish.
“We look forward to seeing the new tax consolidation strategy plan ahead,” said analyst Richard Francis Fitch. “We always knew any reform would be difficult and we wanted to see the outcome of the last Congress.”
Markets are expected to remain volatile in the short term, the bond yield curve will widen and the pesos will continue to amortize until at least investors see the new tax proposal, Scotiabank Colpatria analysts wrote in a note on Sunday.
The decision to cancel the tax plan shows the weakness of the Duque government and the inability to reach a consensus in the legislature, said Camilo Perez, chief analyst at Banco de Bogotá.
“The markets were priced to lose Colombia’s level of investment, but today’s news confirms that scenario,” Perez said.