- President Ivan Duque said on Twitter that commerce minister Jose Manuel Restrepo, an economist, would become finance minister;
- Duque withdrew the proposal on Sunday after staunch opposition from lawmakers and deadly street protests;
- The withdrawn proposal would have increased taxes paid by individuals and businesses, expanded sales taxes and eliminated exemptions and deductions.
Colombia‘s finance minister resigned and the country’s currency, bonds and stock markets fell on Monday after President Ivan Duque withdrew a tax reform proposal seen as important for fiscal stability.
Duque retracted the proposal on Sunday after staunch opposition from lawmakers and deadly street protests, sparking market uncertainty and comment from ratings agency Moody‘s.
“My continuance in the government will complicate the quick and effective construction of the necessary consensus,” Finance Minister Alberto Carrasquilla said in a statement, warning Colombia‘s macroeconomic stability would be “seriously compromised” without reform.
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Duque said on Twitter that commerce minister Jose Manuel Restrepo, an economist, would become finance minister.
The president has said tax reform is still necessary and a new proposal will be made with consensus among business leaders, political parties and civil society.
The withdrawn proposal, originally intended to raise more than $6 billion in revenue, would have increased taxes paid by individuals and businesses, expanded sales taxes and eliminated exemptions and deductions.
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The Colombian currency fell 1.38% to a six-month low of 3,804.95 pesos per dollar. Since the tax proposal was sent to Congress on April 15, the peso has depreciated 5.34%.
The yield on September 2030 government bonds shot up to 7.245% from 6.92% during the previous session, while the country’s main stock index COLCAP fell 2.72%.
Market participants said a lack of clarity about when the new proposal would be ready and how much it would seek to raise has created doubts about whether a plan could be approved before the end of the legislative session in June.
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Delays would make it harder to send a message of fiscal consolidation to investors and ratings agencies if the Andean country hopes to avoid a ratings downgrade.
“In terms of markets, we think the withdrawal of the fiscal reform proposal will increase volatility, and it could steepen the yield curve even further and bring more COP (Colombian peso) depreciation in the short run until President Duque shows the new proposal,” said Sergio Olarte, chief economist at Scotiabank in Colombia.
The withdrawal of the tax proposal is negative from a credit perspective because of the uncertainty it creates about government ability to get fiscal consolidation measures approved in the medium-term, Moody’s analyst Renzo Merino said.
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The ratings agency will review the factors that led it to downgrade the country’s rating outlook to negative last year, Merino said, with special attention paid to tax reform prospects.
Any reform will face an uphill battle in congress, market participants said, but garnering support from stakeholders as Duque has promised could be the way forward. Any approved proposal will likely generate less revenue than originally sought by the government.
Unions and other groups have called for protests to continue. There is not yet a clear death toll, though official sources have confirmed some 17 deaths, including one police officer.