With the government now in the second half of its four-year term and looking to bond markets to fund its ambitions, Petro’s management of public finance is coming under increasing scrutiny. Though tax revenue has consistently fallen short of expectations, Finance Minister Diego Guevara insists the administration will take necessary steps to guarantee fiscal sustainability and retain market confidence.
“Debt-service payments will be much larger than budget investments and that’s synonymous with fiscal responsibility,” Guevara told reporters Friday after the central bank decision. “That’s why markets keep believing in us and that’ll be the signal we keep sending.”
Yet investors may demand more than promises to shore up public accounts. Lula ignited a market rout that lasted for weeks in Brazil after announcing a plan to cut 70 billion reais ($11.3 billion) in public spending together with tax breaks for low-income families. Even with Finance Minister Fernando Haddad pledging restraint, it seemed to confirm fears that his government was willing to keep spending to support households, even if it further fueled inflation and public debt.
What Bloomberg Economics Says…
“The selloff in Brazil markets due to increasing worries about fiscal imbalances is a cautionary tale that other countries in the region should be paying close attention to. Debt levels in Brazil are higher so there is less flexibility and more urgency, but the trend in other countries like Colombia is the same.”
— Felipe Hernandez, Latin America economist
With Brazil’s budget shortfall equivalent to nearly 10% of GDP, markets aren’t buying the government’s reassurances. The real, which is down more than 21% so far this year, hit a record low last week while Brazilian sovereign bonds sold off deeply. The central bank is raising rates again, with analysts expecting borrowing costs to hit 15% by midyear, as well as spending billions in currency markets to stave off further losses.
The peso, meanwhile, is down more than 12% this year while the Andean nation’s sovereign debt has returned -1.3% — the worst-performing government notes in a Bloomberg emerging-market index after Malaysia. The spread between the interest rates paid by dollar-denominated Colombia bonds and those offered by US Treasuries is wider than Brazil’s and those of other countries with lower sovereign credit ratings, according to JPMorgan Chase & Co.
“Brazil is a warning sign for the region,” Andres Abadia, chief economist for Latin America at Pantheon Macroeconomics, said in an interview. Lula’s experience could help make other leaders “more aware of their need to tame their fiscal deficits,” he added.
While it remains to be seen whether Petro and Guevara take that lesson to heart, Colombia’s central bank wants to avoid the fate of its Brazilian counterpart. In an October presentation, policymaker Roberto Steiner warned against following Brazil’s example of lowering interest rates too fast and then having to reverse course.
Another central bank board member, Mauricio Villamizar, said Monday that “Colombia is not exempt from risks that also compromise the sustainability of the downward cycle.” It’s in situations like this, he added, that “prudence pays dividends.”
Beyond catching analysts off guard, Friday’s decision to lower the benchmark rate by a quarter percentage point to 9.5% also split the policymaking committee. Five members backed the move while Guevara and one other director voted for deeper cuts.
Petro railed against the smaller reduction, deriding it on social media as politically motivated. He also signaled that rates would fall faster once he names two new central bankers in the new year. By that point, the president will have personally appointed four of the monetary authority’s seven policymakers.
“The board will surely become more dovish next year, but there is a risk that they will make a policy mistake,” said Pardo, the XP analyst. Should that occur, the peso will continue to slide, “inflation expectations will unanchor, and we’ll have a Brazilian-style scenario where rates will rise.”
On the fiscal side, all eyes now turn to Guevara — who became Petro’s third finance chief this month after his predecessor resigned amid a corruption scandal. The minister must present a plan detailing the government’s financial strategy for 2025 in coming weeks. But a few hours before he issued the budget decree, the independent watchdog warned that the government’s cash position is so weak that “structural liquidity difficulties” could arise.
Camilo Perez, chief economist at Banco de Bogota, believes the same pattern of a bloated budget and disappointing revenues that marked the first half of Petro’s term will continue. “The government’s cash flow will be under pressure in 2025,” Perez said.
Last week, the government suspended applications for housing subsidies aimed at helping vulnerable households as its fiscal problems began to spill over into social programs. Guevara nonetheless re-committed to meeting the government’s deficit targets in a conference call with investors.
Munir Jalil, chief Andean economist at BTG Pactual, expects further spending cuts and said Petro’s economic team must carefully manage its reputation as the nation plans to issue about $4.5 billion in hard-currency bonds next year to help cover maturing debt.
“If the government does not cut spending, it will struggle to access these resources at favorable rates,” Jalil said.
–With assistance from Maria Eloisa Capurro and Ezra Fieser.