Colombia Congress Passes Deficit-Reduction Law Capitalizing on Mining Boom

Colombia’s Congress approved legislation to allow the Andean nation to capitalize on its oil and mining wealth to reduce debt and create a stabilization fund to cushion the economy during downturns.

The “fiscal rule” targets a central government budget deficit of no more than 2.3 percent of gross domestic product in 2014, down from a projected 4.1 this year, and seeks to narrow the gap to no more than 1 percent by 2022, according to the Senate bill passed today in a 58-7 vote.

Colombia is counting on surging foreign investment in its mining and energy industries to help boost annual economic growth to 6 percent and reduce its debt burden.

Stricter fiscal targets may win Colombia further upgrades to its credit ratings. Fitch Ratings said it would wait for approval of the so called fiscal rule before considering whether to join Moody’s Investors Service and Standard & Poor’s and raise the country’s credit rating to investment grade.

“The fiscal rule is basically a good aim toward correct fiscal behavior,” said Finance Minister Juan Carlos Echeverry after the approval.

The legislation also creates a dollar-denominated rainy day fund, modeled on one in Chile, which will save excess mining and energy revenue overseas that will limit gains by the peso.

The Senate version must now be reconciled with the lower house bill passed in May.

Implications

While Colombia was slower to emerge from the global recession than its Latin American neighbors, growth this year is expected to exceed the pace achieved by Mexico and Brazil, the region’s two biggest economies.

After growing 4.3 percent last year, the government forecasts growth of as much as 6 percent this year.

President Juan Manuel Santos, who took office in August, has vowed to maintain that pace in coming years, fueled by foreign direct investment that the Trade Ministry says will reach about $13 billion a year by 2014.

Most of the investment is tied to mining and energy as Colombia aims to expand oil production to 1.7 million barrels of crude a day in 2020, up from 903,000 currently.

“This guarantees Colombia will have a sustainable and constant path of growth in the coming years and that we don’t spend what we don’t have,” said Andres Jimenez, head of international sales for Interbolsa SA, Colombia’s biggest brokerage.

“The fiscal rule is the beginning for Colombia to climb rapidly up the investment grade ranks so that we are graded A and above.”

Ratings, Peso

Moody’s rates Colombia Baa3, the lowest level of investment grade, while S&P has a BBB- rating on Colombia.

To ease pressure on the peso, Latin America’s best- performing currency this year, the extra revenue will be stored overseas along with dividends from state oil company Ecopetrol SA.

The fund, to be administered by the central bank, may invest in financial assets including Colombian foreign debt purchased in the secondary market, and may also be used to pay interest on debt when needed.

While Santos’s government has stepped up efforts to curb the peso’s 7.7 percent rally this year, Echeverry and central bank President Jose Dario Uribe have said that so far capital controls like ones used in Brazil aren’t needed.

Santos, a former finance minister, had promised to balance the budget several years earlier during his campaign though heavy rains this past year forced an increase in spending to rebuild washed-out roads and provide shelter to millions of flood victims.

The bill still needs to be reconciled with a version passed in the lower house before it goes to be signed into law by Santos.

Targets, Chile

The Senate version of the bill calls for a reduction of the deficit to no more than 2.3 percent in 2014, 1.9 percent in 2018 and 1 percent or a surplus by 2022.

A lower house version seeks a deficit of no more than 2 percent from 2015.

Congress last week passed a law to modify distribution of taxes on commodities production to allow a greater swathe of the nation to benefit from rising revenue and the accumulation of savings.

The Colombian fiscal rule is modeled on one in Chile, which saves some of its income from copper sales for years when economic growth slumps and to ensure the nation isn’t as vulnerable to swings in the price of copper, which makes up 53 percent of exports.

The funds helped the Chilean economy withstand the 2009 recession and provided some of the financing to rebuild after the 8.8-magnitude earthquake last year that caused almost $30 billion in damage.