Colombia's President Petro Faces Mounting Fiscal Pressures

Colombia's president, Gustavo Petro, faces a difficult economic and political landscape as he enters his final full year in office. Fiscal pressures are mounting. Executive-legislative relations appear to be hitting a low point. Government borrowing costs are elevated and market conditions could become even less favorable in the new year. It is unclear how President Petro will navigate these institutional constraints and market pressures. While the administration says it remains committed to the country's fiscal rule, a lack of policy discipline could potentially have negative implications for Colombia's BBB (low) credit ratings.

Key highlights include:

-- Colombia's fiscal problems are piling up: the 2024 deficit is expected to have reached its highest level in over 20 years (excluding the pandemic years), large-scale spending cuts are needed to comply with the fiscal rule in 2025, and a constitutional reform, which congress passed in late 2024, will add to spending pressures over the medium term.
-- The Petro administration's task of consolidating fiscal accounts is complicated by an opposition-controlled congress, which opposes raising taxes, and the President's policy goal of lifting social spending.
-- President Petro's willingness and ability to address the government's public finance challenges amid institutional constraints and market pressures could have implications for Colombia's BBB (low) credit ratings.

"Colombia's macroeconomic picture is not all bad: inflation expectations are anchored within the central bank's target range, the current account deficit has narrowed to a more sustainable level, and the economic recovery is expected to accelerate this year," says Michael Heydt, Senior Vice President - Sector Lead, Global Sovereign Ratings. "However, the fiscal situation has clearly deteriorated. The key question for Colombia's credit profile going forward is how President Petro will balance the pursuit of his progressive agenda with the need to retain investor confidence."