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(Bloomberg) – President-elect Gustavo Petro is quietly reversing some of his radical top ambitions as he faces the truth of governing Colombia amid runaway inflation and a huge budget deficit, according to political and monetary professionals who spoke to Bloomberg.
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The new congress, which began sitting this week, will debate a tax bill to finance social spending and reduce the deficit. The government needs to accumulate revenue through the equivalent of five percentage emissions of gross domestic product.
In practice, it’s raising more than a fraction of that amount, analysts said.
Petro has forged alliances with so many parties that he will most likely be forced to dilute his program to keep them all on board, said Sergio Guzman, Colombia’s director of Risk Analysis.
Petro “promised the sun and the moon,” Guzman said. “It seems that now there is a landing in reality. He has tried to form such a broad coalition that it will dilute much of the initial proposals with which he campaigned.
Guzman, one of 3 participants in Bloomberg News’ “Colombia Market Talk” on July 19, which also included:
Camilo Pérez, Chief Economist of Banco de Bogotá
Jackeline Pirajan, Economist at Scotiabank Colpatria
Petro takes office on Aug. 7 and members of his economic team said the bill would be presented to lawmakers on the same day.
On average, tax expenditures in Colombia over the past three decades have exceeded about 1% of GDP, according to Perez.
The Colombian peso has performed the worst among emerging market currencies over the past month, down more than 9%. Perez estimates that about 80% of this is due to external factors, which adds expectations of a more powerful tightening of the Federal Reserve, while the rest is explained by local factors, basically similar to political uncertainty.
The appointment of Columbia University professor Jose Antonio Ocampo as finance minister has been key to allaying market concerns, for Scotiabank’s Pirajan.
“The signal it sends is that the new government needs to act according to existing rules, and is on the hunt for some changes, it brings calm to the markets,” he said.
Bond yields
With the country’s peso bond yields soaring in recent times and foreign investors holding more than a quarter of the debt, the new government would “shoot itself in the foot” if it spooked them with a radical speech, Perez said.
“Any competitive measure that scares away investors will lead to higher costs,” he said. “One thing is what you say in the speeches of the Crusades, and another thing is when you are president. “
The recent drop in the Colombian peso is not due to the flight of foreign investors, but because Colombians send their cash abroad, Perez said. Lately, investors are more focused on local politics than on the functionality of the economy, he said.
Expected increases in fuel and minimum wage next year will mean continued pressure on clientArray according to Pirajan, who expects inflation to end this year at 9. 7% and around 5% in 2023. That’s still above the 3% midpoint of the central bank’s target. . interval.
Perez expects inflation to exceed 10% and decline to 9. 6% by the end of the year and 5. 6% by 2023 due to declining food prices.
In July, policymakers are expected to raise rates through 1. 5 percentage points to 9%. While Pirajan expects the bullish cycle to avoid there, Perez says it’s possible they will raise the policy rate to 10. 5% if inflation continues to worsen.
Even after Petro pledged to give “productive organizations” a voice in setting financial policy, Guzman does not believe he will adjust the central bank’s independence.
This contrasts, he says, with the board of directors of national oil company Ecopetrol SA, where the new management has made it clear it will seek to replace its board members.
“You have your battles,” Guzman said. To know what the central bank means to the markets would be to cross a red line. “
The peak inflation rate means the Petro honeymoon era can be as short as a hundred days, Guzman said. Following the crusade’s promises to increase social spending, his supporters “will ask the government to keep the promises it made elected,” he said. .
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