December 4, 2018 / 6:46 PM / 9 days ago

Fitch sees fiscal risks for Colombia in 2020 due to tax bill dilution

BOGOTA, Dec 4 (Reuters) - Fitch credit rating agency on Tuesday expressed concern over Colombia’s fiscal situation in 2020, because a diluted tax reform heading through congress forces the government to cut spending and pressures the deficit targets.

The government last week made major changes to its tax bill, known as the financing law, leaving it with a little over half the 14 trillion pesos ($4.4 billion) it had initially sought as lawmakers refused to back a sales tax on basic foodstuff.

Fitch said that although the nation will likely meet this year’s fiscal deficit target of 3.1 percent of GDP, meeting the 2019 goal of 2.4 percent would require serious cuts in spending, and by 2020 the financing law would not have a positive effect.

The financing law - which raises income tax on the middle class and high earners and reduces business taxes - could negatively affect public finances if oil prices do not improve and the economy fails to speed up.

“There are downside risks for 2020 if the offsetting factors prove less favorable than the authorities estimate – although the consolidation target is far less ambitious,” Fitch said in a report, adding that the fiscal deficit target for 2020 is 2.2 percent of GDP.

“The net impact of the various tax measures will be close to zero in 2020 as the impact of corporate tax cuts is felt,” Fitch said.

In mid-November, Fitch maintained Colombia’s sovereign risk rating at “BBB”, while leaving the outlook stable, but noted that public debt remains sensitive to movements in the exchange rate and interest rates. (Reporting by Nelson Bocanegra, writing by Helen Murphy; editing by Diane Craft)

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