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Colombia: Investment Grade, Strong GDP Growth

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Colombia will grow its GDP almost 5 percent yearly and get investment grade this year.

BY ALBERTO BERNAL

Colombians overwhelmingly reelected the democratic security policy of President Alvaro Uribe on Sunday. (..). President-elect Juan Manuel Santos received 9 million votes, the highest voting count in the history of Colombian presidential elections. (…)

In our view, a Juan Manuel Santos presidency implies 95 percent continuity of the Uribe administration successful economic policies. We expect the Colombian economy to expand more or less in line with potential in the next four years (+4.9 percent year-over-year, on average). We think that if we are right in our perception,
Colombia will be able to reduce poverty levels from the current 40 percent-handle into the 20 percent-handle by 2014. We expect Colombia to be awarded investment grade status this year by at least one of the majors (most likely Moody’s). The markets are already trading Colombian assets as if it were investment grade anyway.

We expect President Santos to focus on structural policies geared at boosting formal employment. We do not expect President Santos to move ahead with a tax reform that includes increases in the levels of the VAT and income taxes at this time. In our view, there is currently no need whatsoever to boost fiscal revenues via increasing taxation rates. According to our fiscal models, the shortfall of the fiscal accounts in 2010 and 2011 will come significantly lower compared to the markets and the official expectations

 

Our positive (and non-consensus) view on the fiscal front is based on the following facts. First, we expect the rate of growth of primary spending to fall somewhat in the second half of this year following the “new government syndrome” (e.g. it takes time for government officials to get the handle of the different procurement processes). Second, we expect the cost of servicing debt to come-in lower compared to official expectations, because the Colombian peso/US dollar will trade stronger, and because the TES curve will perform better than expectations. Third, we continue to think that the rate of growth of tax revenues will come higher than expected by the government –the Uribe administration still considers that the nominal rate of growth of tax revenues during 2010 will show a negative sign.

As we have argued in other research pieces, we see the rate of growth of the Colombian economy coming at +4.5 percent year-over-year in 2010, materially higher than the market’s +3 percent year-over-year consensus. We think that a forecast of negative tax revenue growth in 2010 is overly conservative under the current scenario. Among other things, we think that (1) VAT receipts will come materially higher than expected by the government, (2) that tariffs will increase in 2010 following higher import activity (imports are up +11 percent year-to-date and we are forecasting them to expand by 21 percent year-over-year in 2010), (3) that the losses of the regional utility companies will be lower than expected following higher growth, and (4) that the level of financial tax revenues and gasoline tax revenues will come higher than expectations following better activity and a reduction of smuggling activity from Venezuela.

In our view, the Santos administration is/should focus its current very high political capital –Santos will control 80 percent of the Colombian Congress-- on (1) further evolving the efficiency of the Colombian pension system (moving into a variable retirement age system based on life expectancy), (2) on further focalizing social spending, on (3) approving a long-term fiscal rule to sterilize booming mining export receipts, and (4) on making Colombia’s labor laws more friendly (to increase levels of formalization).
Colombia’s labor laws have continued to keep the size of the underground economy at very high levels. Among other things, high informal employment implies that the cost of subsidizing pensions (from the stand-point of the Central Government) remains high.

Alberto J. Bernal-León is Head of Research at Bulltick Capital Markets. This column is based on an analysis he sent to clients.

 

 

 

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