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Fitch: Spending cuts necessary to achieve Colombia's 2019 deficit target

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Fitch: Spending cuts necessary to achieve Colombia's 2019 deficit target

Colombia needs to implement further fiscal adjustment in order to achieve its deficit target for 2019, especially with a watered-down tax reform bill that reduced its original revenue forecasts, Fitch Ratings said Jan. 17.

The country's tax reform proposal, which supports the government's long-term fiscal consolidation goal, originally meant to cut the corporate income tax rate and broaden personal income and value-added taxes.

Faced with legislative opposition, the government changed several elements of the reform and reduced its 2019 revenue projection to 0.7% of GDP from 1.4% previously.

After achieving a central government deficit of 3.1% of GDP in 2018, the Colombian government aims to achieve a 2.4% deficit this year — the largest fiscal adjustment target since the country's fiscal rule implementation in 2012, Fitch said. The country will need to make expenditure cuts in order to meet this target, given the large adjustment and the change in the tax reform, the rating agency noted.

Although Fitch believes the 2019 target is achievable, it noted that additional measures are needed in order to achieve the 2020 deficit target of 2.2% of GDP.

The country's fiscal rule is an important credit strength, but several changes to the fiscal targets could impact the government's credibility, Fitch said. However, the government's history of prudent macroeconomic policies serves as a significant rating support, the rating agency noted.