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Moody's: Fiscal challenges await Colombia's next president

Regardless of who wins Colombia's presidential runoff election June 17, the country's upcoming administration will face challenges as continued moderate growth makes it harder to achieve lower fiscal targets, Moody's said June 12.

"A more polarized political climate could make it harder for the next president to cut spending or raise taxes, but the new administration will need to address fiscal issues to put debt, which has been rising in recent years, on a downward trajectory," Moody's said.

After posting a 1.8% growth last year, Colombia's real GDP should recover to 2.6% in 2018 and by 3% next year, according to Moody's estimates. Growth could further reach about 3.5% over the next three to five years as the country relies less on oil and infrastructure bottlenecks are addressed, the rating agency added.

Economic expansion will remain moderate, however, compared to Colombia's pre-oil growth performance, which would complicate fiscal consolidation starting 2019, Moody's said. A decision to ease the government's fiscal targets from 2019 to 2026 also delays Colombia's return to a structurally balanced budget, Moody's noted. Albeit being more feasible, the higher fiscal deficit targets could drive a larger debt burden, the rating agency added.

Center-right candidate Iván Duque and leftist Gustavo Petro are headed to the last stage of the presidential election after garnering the most votes in the first round of voting. Although the two candidates are from different political ideologies, Moody's said it expects "the country's center-right majority in Congress to reduce the risk of a marked departure from macroeconomic policies that have defined Colombia in recent years."

Moody's also sees both candidates supporting investment in public-private infrastructure projects. "That will help modestly boost economic growth, which will benefit the banking system, but clearer regulations will be needed to increase investment in oil and gas," the rating agency noted.

Fitch Ratings earlier expressed the same sentiment as that of Moody's, saying that Colombia still faces challenges in fiscal consolidation despite improved fiscal discipline over the years. Following the government's fiscal adjustment in 2017, Fitch expects that the size of the needed adjustment to abide by Colombia's fiscal rule will become increasingly difficult to achieve beyond 2018.