LatinFinance - November/December 2016 - 2

NOVEMBER/
DECEMBER
2016
FRONT NOTES

EDITOR-IN-CHIEF Katie Llanos-Small
DEPUTY EDITOR Kevin Gray
NEWS EDITOR Aaron Weinman
SENIOR REPORTER Mick Bowen
REPORTER Peter Agra
RESEARCH ASSOCIATE Nicholas Laursen
CONTRIBUTORS Rodrigo Amaral, Robert Shaw,
Jason Mitchell, Charles Newbery
COPY EDITOR Sharon Kahn
ART DIRECTOR Rosa Matamoros-Sense
COVER ILLUSTRATION Fredrik Broden
CARTOON ILLUSTRATION Christopher Weyant

Bumpy path
Roads between Colombia's major cities are notoriously difficult to traverse: narrow, winding thoroughfares that make a journey far longer than it should be. The 4G highway building program now
underway hopes to change that, but it has been a long time coming.
The experience, however, is perhaps an apt metaphor for the country's path to peace.
Colombian voters' rejection of a peace plan between the government and the Fuerzas Armadas
Revolucionarias de Colombia (FARC) came as a shock to many observers outside the country. The plan
offered plenty of concessions to the rebel group - but it was a deal, at least. And getting even that far
had taken years of negotiations.
The global community rallied around the Colombian administration, notably with a Nobel Peace
Prize for President Juan Manuel Santos.
Investors, meanwhile, analyzed the financial implications.
The so-called economic dividends of peace, stemming from the core goals of fewer homicides and
less destruction of property, were set to lift Colombia in investors' eyes.
But there was another part, too. Before the referendum, it had been expected that a swell of popular
support for Santos and the peace process would ease the way for a difficult tax package to pass. The
rejection of the peace deal now puts that in jeopardy.
What's more, the tax reforms are a crucial part of economic adjustments needed for Colombia to
retain its triple-B rating. The package is expected to increase the country's value-added tax, cut the corporate rate and get rid of loopholes. If the administration can't raise taxes, it will need to cut spending
to hold onto its current Baa2/BBB/BBB rating. Either option is sure to be unpopular.
Finance Minister Mauricio Cárdenas insists the tax reform can pass (see page 52). He points to a complicated bill to raise taxes on alcohol - a condition of OECD access - as proof the government retains
the political capital needed to get tricky legislation through congress. The liquor taxation changes were
given the green light in early October.
Colombia has received a wave of fresh international investment in recent years, notably in its domestic sovereign bonds, TES instruments, as well as into its 4G infrastructure program. These capital flows
are unlikely to dry up with
a downgrade - the sovereign has a buffer before
it nears junk status. But a
lower credit rating would
diminish investor appetite.
In the end, the government may be able to muddle through along middle
path, watering down the
tax reform package to get
political approval.
What is clear, though, is
the country faces a complicated road ahead. LF

2 L ATINFINA NCE.COM - November/December 2016

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Table of Contents for the Digital Edition of LatinFinance - November/December 2016