About Public Expenditure and the Fiscal Rule in Colombia's Risk Ratings.

The fiscal rule contemplates, in accordance with the Financial Plan recently presented by official sources, that when there are periods of lower oil revenues and in the midst of an economic slowdown, a greater fiscal deficit is allowed, which through greater public spending countercyclical policies are going to be implemented that contemplate resources destined for greater consumption and public investment that will mitigate the economic slowdown or drop in oil revenues.

That is to say, the fiscal rule contemplates the possibility of having a larger fiscal deficit temporarily, when externalities occur in the economy such as shocks in downward oil prices or strong economic slowdowns. Once the public spending policies have been exercised to counteract these externalities according to the fiscal rule, the fiscal deficit targets that had temporarily risen must resume the downward path and go down.

In effect, these are the years 2.023 and 2.024 where the annual transition implies an economic deceleration with a record of 1.2% in GDP for 2.023 after 7.3% in 2.022. This deceleration continues in the year 2.024 and it is estimated that only reach 1.5% in GDP at the end of the year.

Also, another reason contemplated in the fiscal rule of allowing a greater fiscal deficit is that of a fall in oil revenues and is the case of the fall in oil prices from 2.023 to 2.024 and to 2.025 from 99.1 dollars per barrel in that first year went to 82.4 in 2.023 and for 2024, 78 is expected.

The previous causes that allow a greater fiscal deficit as contemplated by the fiscal rule show that the fiscal deficit within what is allowed rises from -4.2% obtained in 2.023 to -5.3% in 2.024. Which is the same level of fiscal deficit obtained in 2.022.

The fiscal deficit of -5.3% in 2024, higher than the -4.2% in 2023, is explained by several factors such as the following. Lower total income (especially tax) due to the decision of the Council of State to declare unenforceable the non deduction of royalties from the income tax of oil and mining companies. Also due to lower collections than those previously estimated in the Budget law approved last year and in those for litigation arbitration.

A portion of the reductions will be offset by a downward adjustment in public spending that does not affect the main social investment projects. This reduction in spending only compensates for part and not all the reduction in income and therefore the fiscal deficit (and the debt) increases for the year 2.024 compared to the year 2.023. But as mentioned before, this increase in the deficit is allowed within the fiscal rule for the reasons explained earlier in this note.

In this way the country is complying with the fiscal rule, therefore the risk rating agencies must maintain the country's rating. But there are risk factors for or against the expected behavior of the fiscal deficit. As forces in favor there is a higher than expected increase in the price of oil and also greater activity by Dian in correcting the evasion. Negative factors include a smaller reduction in spending than expected or a drop in oil prices to a level below the expected price.

To obtain a deficit lower than that calculated in the Financial Plan of -5.3% in this year 2.024, public spending would have to be adjusted downward in a greater amount. In fact, within the calculation of the deficit of -5.3%, a reduction in spending of -$16.7 billion is expected with respect to that included in the presentation of the nation's general Budget last year. But this reduction is barely half of the decrease in income, which also compared to that Budget reaches -$32 billion, which is why income falls well below the fall in expenses and the fiscal deficit grows as it does a greater contraction in spending is needed to avoid this impact.

Thus, a fiscal deficit that goes from -4.2% in 2023 to -4.5% in 2024 instead of -5.3% as it appears in the Financial Plan would be more convincing so that risk rating agencies do not consider assigning a lower rating during the present year for the country, since there is a low economic growth of 1.2% and 1.5% in GDP for the last two years and that influenced some to go from stable to negative the ranking in which the country is classified. These rating agencies closely follow the country's economic policy.

​It remains to be seen the longer term panorama, ten years from 2.023, which is included in the analytical work prepared by the official source and is the Medium Term Fiscal Framework in which income, expenses and the deficit are projected, document which would anticipate the expected results in terms of the return to the level obtained in 2.023 of -4.2% of the fiscal deficit in the assumption that by 2.024 it reaches -5.3% as it appears in the Financial Plan and with a possibly greater adjustment in public spending that reduces the deficit, as well as the presentation of the expected results for the following years.

A fiscal deficit of -4.2% and lower, with a recovery of economic growth towards 3% in GDP higher than the 1.2% of this year 2.024 and which is a figure consistent with the country's historical growth along with inflation at low that this year it will reach 5% or 6% and next year it will reach 3% or 4% are indicators that would allow the perspective included in the ranking in which the country is located in the risk rating agencies to be raised from negative to stable or positive. A GDP growth of 4% or 5% could make the country recover the lost investment grade ranking by these rating agencies, a grade that was lost in 2.020 and currently the country is one floor below.

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Today (tuesday 6) regarding world markets, stock markets are growing in the United States and Europe due to positive results in corporate profits and a perspective of stability in the FED's interest rate before starting the first decline.

The price of oil rises due to the perception of greater dynamics in China and the visit to the Middle East of the United States Secretary of State. WTI is trading at US 72.9 per barrel and BRENT at US 78.15.

In Colombia, the Stock Market in mid morning behaves the same as yesterday's close and the peso shows appreciation against the dollar to 3.945.3 compared to the TRM for today 3.975.7.