Tax cuts spur investments in Colombia

Tax cuts spur investments in Colombia

Economy & Policy Corporate & Sovereign Strategy Capital Markets Regulation Politics Colombia

Investment in Colombia has grown at a clip of 9% since the government cut taxes in December last year, said the central bank governor, Juan José Echavarría.

"The fiscal reform gave a very large incentive for the private sector to operate," Echavarría said.

The tax cuts lowered the VAT on capital goods, "as it should be," Echavarría said, whereas previous administrations did not do it because they thought it would cost half a percentage point in GDP growth.

"Investment is growing at 9% now, so let's see," he said.

Alberto Bernal, the chief emerging markets and global strategist at XP Securities, pointed out that investment in Colombia now equals 26% of GDP, while it has stood at 13% in recent years.

The government enacted the tax cuts on December 28 last year, lowering corporate income taxes to 30% from 37% over four years and offering a one-year amnesty for tax evasion, among other measures.

According to Echavarría, the Colombian economy is on track to grow 3.5% this year, up from 2.6% in 2018 and back to the levels the country had averaged over 15 years.

Inflation is also coming closer to the central bank's target range of 3.2%, he added. 

After leaving the benchmark interest rate at 4.25% since May 2018, Echavarría said the Banco de la República could raise rates one time this year.

Slightly higher interest rates could bode well for the corporate issuers in Colombia that are preparing to come to the local bond market to refinance debt maturing in 2019 and 2020, said a source in the local debt capital markets.

The tax cuts, however, could present more problems down the line, as the national debt hovers around 48% of GDP, said Richard Francis, the director of sovereign ratings at Fitch.

"One of the ideas discussed is for [state-owned oil company] Ecopetrol to sell some assets and equity, but you can only sell assets once. It's a Band-Aid for the long term," Francis said.

Echavarría, Bernal and Francis spoke on a panel hosted by the Andean American Association and Hogan Lovells in New York.

 

The news that moves markets

Read the day's transactions and rumors right in your inbox.

Start free trial