Colombian finance minister Oscar Ivan Zuluaga is pushing forward an initiative to stabilize transfers to regional and municipal governments that absorb more than 32% of federal revenues.
Zuluaga will lobby in congress in Bogota next week for a constitutional reform that would link increases in the transfers to the inflation rate, and abandon the current system which links transfers to the rate of economic growth.
“That is the priority in our legislative agenda,” Zuluaga told Emerging Markets in an interview. He added that president Uribe has a wide base of support in congress.
Congress’s deliberations will be followed closely by debt analysts, who say that the problem of the transfers needs tackling urgently if Colombia is to consolidate its finances, which are saddled with a federal government deficit of 4.1% of GDP.
Ricardo Amorim, chief emerging markets analyst with WestLB in New York , said the fiscal accounts are strained by pension liabilities and federal transfers to municipalities. “Fiscal problems at the federal level have hindered investing in the oil sector.”
Pension reform also worries Colombia watchers, who say that liabilities harm the fiscal accounts. Zuluaga said three pension reforms in the last four years have reduced government obligations substantially, although he admitted the pension bill is the equivalent of 160% of GDP, and this year’s payments amount to 1.3% of GDP this year.
On Colombia ’s general outlook, Zuluaga is bullish and looks forward to an investment grade rating, “In the last four years, we have recovered confidence in the economy, bringing investment inflows that have become the driver of growth,” Zuluaga said. “Economic growth is sustained by our meeting our inflation goal, improvements in the fiscal deficit and reprofiling the foreign debt.”
The finance minister, who took office this month, will emphasize Colombia ’s progress in an address today at an event hosted by Emerging Markets. “The country is on the way to recovering investment grade,” he said.
Standard & Poor’s last week raised Colombia ’s rating to BB+ and previously Fitch Ratings had revised the outlook to positive, citing improved fiscal and external solvency. Since 2002, net debt has dropped to 31% of GDP, from 45%.
“We aspire to raise investment above 26% of GDP,” Zuluaga said, adding that investment grade would help reach this goal. Colombia lost its investment grade rating in September 1999 owing to a recession.
Last year, economic growth was 6-7% with 4.49% inflation; this year growth is expected to decline to 5%. In the four years since president Alvaro Uribe took office, investment has doubled to 26% of GDP.
Securing approval for a free trade agreement with the US is important for the economy’s continued growth, Zuluaga said. “ Colombia wants the US to understand the importance of the approval of the free trade agreement.”
The Andean nation is rapidly expanding its trade relations through agreements with Chile , Mercosur, central American nations and an Andean bloc negotiation with the European Union, Zuluaga added.
The slipping trade balance is a weak point, says Walter Molano, chief of emerging markets research at BCP Securities in Connecticut . “ Colombia is not exploiting their natural resource base which is extensive as other Latin countries are,” Molano says.