Spending cuts worth 6 trillion pesos ($1.8 billion) will likely be insufficient for Colombia to meet its 2016 fiscal goals, economists and investors say, arguing that more may be needed to prevent a debt downgrade.
The country is far better off than neighboring Brazil, which is battling a deep recession. But plunging oil and coal revenues have eroded Colombia’s fiscal accounts, leaving Latin America’s fourth biggest economy scrounging for savings across the board.
Finance Minister Mauricio Cardenas has said the spending cuts, affecting 30 ministries and other state entities, amount to 0.7 percent of gross domestic product and are enough to ensure the government hits its budget deficit goal of 3.6 percent of GDP.
But economists warn the official numbers do not add up and could be even weaker if revenue from oil or taxes come in lower than projected.
“It’s a good measure that calms the effect of the decline in oil revenue, but it’s clearly insufficient taking into account the magnitude of the fiscal problem,” said Andres Abadia, senior economist at London-based consultancy Pantheon Macroeconomics.
The cuts being implemented represent 2.8 percent of the government’s budget. Analysts estimate that a further reduction of about 3 trillion pesos may be needed to hit the target and warn that, without them, the deficit could blow out to as much as 4 percent of GDP this year.
While Cardenas expects government revenue from oil – including overseas sales and royalties paid by companies operating in Colombia – to plunge to $218 million this year from $2.9 billion in 2015, economists see an even bigger drop.
“Government oil revenues are likely to fall to almost zero this year,” said Adam Collins, strategist at London-based Capital Economics.
The value of exports fell 36.6 percent in January compared with the year before – mostly due to the drop in crude prices – and most economists believe the official 3 percent forecast for economic growth this year is optimistic.
The economy grew 3.1 percent in 2015, the government said on Thursday.
Colombia’s debt is rated two notches above speculative grade, but Standard & Poor’s last month lowered its outlook to negative from stable. A downgrade could prompt some investors to leave Colombia’s capital markets.
“They need to be bolder than they have been,” said John Peta, emerging market fund manager for Old Mutual Global Investors in London, which holds Colombian bonds.
“The fiscal issue is a concern and in those circumstances people sell bonds and ask questions later.”
A crucial tax reform could help lift investor sentiment. But it is currently only set to go to Congress in the second half of this year and would not take effect until 2017.
The government has taken austerity measures including double-sided photocopying, reduced gasoline purchases for official cars and a hiring freeze. Cardenas flew to Davos for the World Economic Forum in economy class.
If tax revenue falls below the government’s expected 130 trillion pesos or the reform struggles in Congress, it would “bring the government’s credit rating further into doubt,” said Capital Economics’ Collins.
Rating agency Moody’s said on Wednesday that despite “headwinds” Colombia will be able to avoid a downgrade, as long as it moves toward the fiscal deficit target and the economic slowdown is not sustained.
Still, analysts believe the tight fiscal scenario means the government may also need to engage in domestic bond swaps to extend maturities and amortizations.
Some 15.2 trillion pesos ($4.76 billion) in local treasury bonds come due this year, about 10 percent of total peso-denominated debt.
In June, 11.3 trillion pesos come due, but a high-level finance ministry official ruled out a swap then and declined to be drawn on future actions.
Economists see swaps as inevitable.
“Almost certainly there will be a swap this year,” said Camilo Perez, chief economist at Banco de Bogota.
(Reporting by Helen Murphy and Nelson Bocanegra; Editing by Kieran Murray and Tom Brown)