Fall in worldwide crude oil prices hits Colombian economy
Budget shortfall of $6bn USD
Trade deficit of $449.6 million USD in the year to September, compared to $66.2 million USD last year
The Colombian government approved the 2015 budget on December 2 amid a looming shortfall and a fiscal deficit.
The budget for the coming year was originally based on the assumption that the price of oil would hover around $98 USD per barrel. But crude oil has taken a tumble, and is now at $67.30 USD – more than 30 percent lower – and lawmakers did not adjust the budget accordingly.
The government is now staring down a $6.5 billion USD budget shortfall which they are hoping to make up through imposing controversial tax reform laws.
A financial analyst told The Bogota Post that the new tax reforms are expected to affect entrepreneurs most.
The source said that President Juan Manuel Santos has been meeting with business people over the past two weeks to discuss reducing the proposed tax increases. The source believes that the business community will succeed in convincing the president not to impose such a steep tax hike.
After a proposed vote on the tax reform scheduled for December 3 was delayed due to insufficient attendance, uncertainty reigns over where and when the axe will fall.
Two current types of transaction taxes are set to expire on December 31 of this year – the so-called ‘4 por mil’, that taxes bank account holders 4 pesos on every 1,000 pesos moved – and a wealth tax that has been criticised by businesses. It is unclear whether these laws will be reformed and carried on in some way into 2015 and beyond.
To make matters worse, Colombia has a ballooning trade deficit – meaning the country is importing a lot more than it is exporting.
Foreigners can therefore expect to continue to be affected by the devaluation of the peso in 2015. As the analyst says, the fall in the price of oil globally means the dollar could continue to strengthen against the Colombian peso in 2015.
The Colombian peso has dropped in value by 19 percent in the course of this year. This means expats being paid in pesos could continue to lose money if they change it into dollars or another foreign currency. The cost of imported goods could also increase if the dollar continues to rise.
The uncertainty over tax reforms and the devaluation of the peso could also affect investment in the country, which is not expected to be as high as in 2014. The source said this is primarily due to the uncertainty over tax reforms.
Despite the budget shortfall, the Colombian economy is expected to grow between 4.2 and 4.5 percent, analysts say.
Although falling oil prices, an uncertain tax regime and the trade deficit will affect the country’s economic prospects for 2015, “other sectors will compensate,” the financial analyst said.
Part of the reason for the country’s trade deficit this year is an increase in internal consumption. This is due to increased confidence among consumers due to less unemployment and more stable jobs, they added.
Analysts with Bancolombia agree, signaling that “household purchases will continue to be strong.”
“This is thanks to good wage performance, stabilization in the growth of consumer loans and reviving demand for durable goods,” Bancolombia said in a recently-released report.
Colombia Investing founder and CEO Toby de Lys believes the country has diversified exports, and that other goods will fill the gap created by falling oil prices.
“Colombia’s other exports such as coal, gas and coffee may actually do better in 2015, as other exports finally begin to take flight, given all the recent Free Trade Agreements that will finally manifest next year in terms of real export growth.”