Colombia Central Bank chief joins skeptics of Cardenas forecasts

Bloomberg.- Colombia’s central bank Governor Juan Jose Echavarria signaled that the government’s forecasts for growth and oil prices may be too optimistic, joining investors and ratings agencies who have questioned the assumptions underlying the Finance Ministry’s fiscal targets.

To what extent are we going to comply with the fiscal rule? There are some difficult assumptions made by the government” Echavarria said Wednesday, in an interview in Cartagena. “This will be another topic of discussion in the presidential campaign.”

To comply with the rule, the government must reduce the budget deficit to 1.1 percent of gross domestic product by 2022 from 3.6 percent this year. The financial plan unveiled by Finance Minister Mauricio Cardenas in June shows the government hitting its targets assuming growth and oil prices that exceed what most analysts think likely.

Echavarria said debates should not be about whether to retain the fiscal rule, but how to keep within its limits. Government projections assume that oil prices will rise to $60 per barrel next year and about $70 from 2020, levels not seen since 2014. In addition, it assumes economic growth of at least 4 percent a year from 2019 to 2025.

Analysts surveyed by Bloomberg see Brent crude averaging $54.69 per barrel next year and $54.86 in 2019, while Colombian growth will only reach 3 percent in 2019.

Investors are also skeptical. Colombia’s local peso bonds have returned 1 percent since Cardenas published the plan and related forecasts on June 14, the worst performance among major Latin American economies. Its dollar bonds were the worst performers after Venezuela over the same period.

The government passed a bill in December including a sales tax increase and new levies on dividends aimed at offsetting the impact of lower energy prices. Many analysts are skeptical that it will be enough.

Moody Investors Service said in July the forecasts “might be a bit optimistic”, while Morgan Stanley said in August it doesn’t rule out a credit downgrade in 2018 amid growth and fiscal risks.

 

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