Itaú BBA - Colombia's Finance Minister resigns after tax reform is pulled from Congress

Latam Talking Points

< Back

Colombia's Finance Minister resigns after tax reform is pulled from Congress

May 4, 2021

President Duque has appointed José Manuel Restrepo as Carrasquilla’s replacement

Talk of the Day

Colombia

COVID-19 update: The latest official information from the Ministry of Health is that Colombia registered a daily increase of 485 deaths (495 on the previous day) and 15,909 confirmed cases (from 18,022). The 7-day moving average of deaths increased to 478, from 476 on the previous day, while the 7-day moving average of cases decreased to 17,027 (from 17,210). The total number of deaths now stands at 74,700, with 2,893,655 confirmed cases, which implies a 2.6% mortality rate. The estimated reproduction rate (R) is currently at 1.0 (from 1.03). According to the latest figures provided by the Ministry of Health, Colombia has vaccinated about 6.7% of its population (around 3.4 million individuals).

Following the decision by Colombian President Ivan Duque to withdraw a proposed tax reform after intense protests and political opposition, its author, finance minister Alberto Carrasquilla, resigned from his post. The project was controversial from its inception given that the bulk of the expected revenue was to be derived from expanding the reach of VAT and the personal income tax base, while the country is in the midst of a significant shock and with elections on the horizon. Carrasquilla’s decision aims to drive a swift and efficient building of consensus among lawmakers to ensure the delivery of a required tax reform. President Duque has appointed José Manuel Restrepo as the new Finance Minister. Mr. Restrepo is an economist who until now was Minister of Commerce and has previously served in several public and academic posts. Mr. Duque has also called on lawmakers to urgently reach a consensus on a new proposal to help the country climb out of a worsening fiscal hole. The original reform targeted 2% of GDP in additional revenue of which 1.4% would be used for fiscal consolidation. Proposed plans by former finance ministers, leaders of political parties, and private groups suggest that the best-case scenario would be a bill that achieves half of the initially intended amount. Overall, Duque notes that a new bill should maintain measures to protect Colombia’s most vulnerable while raising taxes on the rich. Recent developments raise the risk that Colombia loses its investment grade rating before the end of the year. Fitch and S&P rate the country one notch above junk. The former has since communicated that they “are waiting to see the new plan on fiscal consolidation strategy going forward,” while Moody’s, which rates Colombia two notches above junk, said that the withdrawal of the tax bill is negative for the nation’s credit outlook.

Last week’s monetary policy meeting minutes unveil that broadly balanced risks justified keeping the policy rate unchanged at 1.75%. Positive aspects such as the activity recovery in 1Q21 despite the reintroduction of mobility restrictions in January and March, which led the technical staff to revise its GDP forecast for this year to 6.0% (from 5.2%), were countered by a weak labor market and poverty levels that soared up to 42.5% of the population in 2020. Meanwhile, well-behaved inflation (expected to converge to the 3% target between 2021 and 2022) also aided the case for keeping rates on hold. Additionally, the board highlighted that fiscal consolidation is key to allow monetary policy to operate correctly, supporting the economic recovery. Meanwhile, the board member that voted for a 25bp cut argued that the fiscal deficit is considerably wider than current account deficit, which in her view is reflective of excess private savings. She also noted that while deposits had grown by 15%, credit remained sluggish despite liquidity injections. Hence, this codirector considered that additional monetary easing, along with new measures to promote financing, would stimulate private consumption and investment. Overall, we expect rates to remain stable for most of this year at the historically low level of 1.75%, but we cannot rule an earlier beginning of the normalization cycle if financial conditions continue to tighten further. Tomorrow, General Manager Villar will present the quarterly monetary policy report.

Chile

COVID-19 update: The latest official information from the Ministry of Health is that Chile registered a daily increase of 98 deaths (104 on the previous day) and 4,895 confirmed cases (from 6,165). The 7-day moving average of deaths decreased to 98, from 101 on the previous day, while the 7-day moving average of cases decreased to 5,743 (from 5,912). The total number of deaths now stands at 26,659, with 1,215,815 confirmed cases, which implies a 2.2% mortality rate. The estimated reproduction rate (R) is currently at 0.95 (from 1.06). According to the latest figures provided by the Department of Statistics and Health Information, Chile has vaccinated about 42.5% of its population (around 8.1 million individuals).

A low base of comparison led to the monthly GDP proxy (IMACEC) to increase a significant 6.4% yoy in March (2.2% drop previously), above the market consensus of 4.5% and our 5.0% call. Nevertheless, the reintroduction of mobility restrictions during the month amid the most recent COVID-19 wave resulted in the first sequential drop (1.6% mom/sa) since October. The annual increase was pulled up by services, in particular health-related, along with the 20% retail increase, contributing 1.8 p.p. to activity. Manufacturing rose 7.7% (+0.7 p.p. contribution) and mining increased 1.8% (+0.2 p.p.). Looking ahead, activity is expected to be even weaker at the margin in April as most of the country was under the strictest lockdown stage for almost the entire month. However, as mobility restrictions began to be eased in late-April, the strong external impulse and support from macro policies are consistent with a significant growth rate this year. We see GDP expanding 6.5% in 2021, with risks tilted to higher growth, following the 5.8% decline last year. **Full story here.

Brazil

COVID-19 update: The latest official information from the Ministry of Health is that Brazil registered a daily increase of 983 deaths (1,202 on the previous day) and 24,619 confirmed cases (from 28,935). The 7-day moving average of deaths decreased to 2,384, from 2,406 on the previous day, while the 7-day moving average of cases decreased to 58,587 (from 59,160). The total number of deaths now stands at 408,622, with 14,779,529 confirmed cases, which implies a 2.8% mortality rate. The estimated reproduction rate (R) is currently at 0.98 (from 0.99). According to state health departments figures, Brazil has vaccinated about 15.1% of its population (around 32.2 million individuals).

The trade balance was positive by USD 10.3 billion in April, virtually in line with our expectation (USD 10.0 billion) and below market consensus (USD 11.2 billion). With USD 26.5 billion exports and USD 16.1 billion imports in the month, the surplus reached a record level and was significantly larger than in April 2020 (USD 6.2 billion). The seasonally adjusted and annualized quarterly moving average of the trade surplus climbed to USD 75 billion in April from USD 57 billion in March, reversing the weakness seen between late 2020 and early 2021. Figures from the last two months show a stronger trade result, especially due to the substantial increase in exports. Meanwhile, imports recovered during the second half of 2020 and returned to pre-pandemic levels, but experienced milder growth lately. For 2021, we forecast a large trade surplus, at USD 72 billion. Although the economic recovery should boost imports, high commodity prices, the global recovery, and the lagged FX effects on exports of manufactured items should offset this move. **Full story here.

Itaú Daily Activity Tracker: The index increased 0.8 points, to 92.6 (latest available data from Thursday, April 29). The 7-day moving average advanced 0.8 points, to 90.6. The indicator is 18.7 points up from the recent bottom seen on April 4, and is now 16.5 points below this year's highest level so far, registered in February 16. Compared to its lowest level (April 10, 2020), the index is currently 43.2 points up. See our report here.

Day Ahead: According to local news, the rapporteur for the tax reform may present an updated draft on the bill today.

Peru

COVID-19 update: The latest official information from the Ministry of Health is that Peru registered a daily increase of 337 deaths (312 on the previous day) and 6,083 confirmed cases (from 5,470). The 7-day moving average of deaths increased to 343, from 336 on the previous day, while the 7-day moving average of cases decreased to 7,060 (from 7,252). The total number of deaths now stands at 62,126, with 1,810,998 confirmed cases, which implies a 3.4% mortality rate. The estimated reproduction rate (R) is currently at 0.81 (from 0.89). According to the latest figures provided by the Ministry of Health, Peru has vaccinated about 3.2% of its population (around 1.0 million individuals).

Paraguay

Day Ahead: The central bank will publish the CPI for April during the day. We estimate headline inflation at 0.2% mom (from -0.2% a year ago), taking annual inflation to 2.8% yoy (from 2.4% March).

Argentina

COVID-19 update: The latest official information from the Ministry of Health is that Argentina registered a daily increase of 540 deaths (156 on the previous day) and 15,920 confirmed cases (from 11,394). The 7-day moving average of deaths increased to 386, from 373 on the previous day, while the 7-day moving average of cases decreased to 20,215 (from 20,625). The total number of deaths now stands at 64,792, with 3,021,166 confirmed cases, which implies a 2.1% mortality rate. The estimated reproduction rate (R) is currently at 0.65 (from 0.73). According to the latest figures provided by the government, Argentina has vaccinated about 15.6% of its population (around 7.0 million individuals).

Mexico

COVID-19 update: According to the Johns Hopkins University, Mexico registered a daily increase of 65 deaths (261 on the previous day) and 1,093 confirmed cases (from 3,025). The 7-day moving average of deaths decreased to 327, from 331 on the previous day, while the 7-day moving average of cases decreased to 2,926 (from 3,006). The total number of deaths now stands at 217,233, with 2,348,873 confirmed cases, which implies a 9.2% mortality rate. The estimated reproduction rate (R) is currently at 0.82 (from 1.11). According to the latest figures provided by the Secretary of Health, Mexico has vaccinated about 9.8% of its population (around 12.6 million individuals).



< Back