Colombia’s peso fell the most among major currencies as local media reported Finance Minister Alberto Carrasquilla is about to step down after bloody street protests led the government to shelf his plan to raise taxes.
Carrasquilla and his deputy Juan Alberto Londono will hand in their resignation this morning, Blu Radio reported, without saying how it obtained the information. La Republica daily said the whole economic team who worked on the tax bill will also quit.
Alberto Carrasquilla
Photographer: Joshua Roberts/Bloomberg
While declining to comment on the reports, Interior Minister Daniel Palacios told Blu Radio that the government will seek to reach consensus with political parties to present a new tax bill to congress. The finance ministry confirmed President Ivan Duque and Carrasquilla were meeting this morning.
President Duque on Sunday said the government is giving up on some of the most unpopular ideas, such as extending the value-added tax to additional goods and services and making more people subject to income tax. He called on lawmakers to urgently reach consensus around a new proposal to help the country climb out of a worsening fiscal hole.
The tax bill was intended to raise revenue to defend Colombia’s investment-grade credit rating and address a surge in poverty caused by the pandemic by funding social programs and providing cash transfers for its neediest citizens.
Read More: Colombia Trading Like Junk Shows Dilemma Facing Poor Nations
Local markets sold off on the reports, with the Colombian peso plunging 1.9% to 3,816.15 per dollar, the worst performer among all major currencies tracked by Bloomberg. Dollar-denominated bonds also took a hit, leading the nation’s average spread to widen 16 basis points, the most in almost a year, according to JPMorgan indexes. The country’s five-year credit default swap jumped to the highest in a month.
Another Blow
The decision to abandon the bill less than three weeks after it was introduced is another blow for Duque and undermines chances he’ll be able to pass other reforms before his term expires next year, said Sergio Guzman, director of Colombia Risk Analysis. The government was already under pressure from days of street protests that have left at least six people dead.
Demonstrators clash with police in Cali, Colombia on April 29.
Photographer: Paola Mafla/AFP/Getty Images
“The government overplayed its hand with the reform, lost, and now is left in a really bad position facing the electorate,” Guzman said. “It effectively makes Duque a lame duck.”
Read more: Colombia Sends Soldiers to Cities Amid Protests Against Tax Bill
Colombia is among the first major emerging markets to attempt to implement large tax increases to bring its ballooning debt burden back under control. Other countries in the region may face similar difficulties trying to boost revenue in economies that are still being ravaged by the pandemic, and nowhere near having recovered from last year’s slump.
Many Latin American nations are also grappling with deficits that expanded during the pandemic, but unlike Brazil, Mexico, Chile and Peru, Colombia’s deficit will widen rather than narrow this year, according to forecasts from the International Monetary Fund.
Street Protests
In an address to the nation on Sunday, Duque called for congress to quickly put together a new plan “and thus avoid financial uncertainty.”
“The reform is not a whim. The reform is a must,” he said.
A new bill should maintain measures that protect Colombia’s most vulnerable while raising taxes on the rich, Duque said. He vowed that no one will pay income tax that doesn’t already pay it.
Duque also called for a host of temporary taxes, including on corporations, the wealthy and dividends. He added that people with higher incomes should pay more and that the government needs to deepen austerity measures.
Investors have sold off Colombian assets since the bill’s introduction in mid-April as they increasingly price in the likelihood that the nation will lose investment-grade status. Both Fitch Ratings and S&P Global Ratings rate the country one notch above junk.
“We are waiting to see the new plan on fiscal consolidation strategy going forward,” Fitch analyst Richard Francis said. “We always knew any reform was going to be difficult and wanted to see the final Congressional outcome.”
Markets are expected to remain volatile in the short term, with the bond yield curve steepening and the peso continuing to depreciate, at least until investors see the new tax proposal, Scotiabank Colpatria analysts wrote in a note Sunday.
The decision to drop the tax plan shows the weakness of the Duque government and its inability to gain consensus in the legislature, said Camilo Perez, head analyst at Banco de Bogota.
“Markets had already been pricing in Colombia’s loss of investment grade, but today’s news confirms that scenario,” Perez said.
— With assistance by Oscar Medina, and Aline Oyamada
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