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Colombia Special Report - Presidential elections follow up - Top candidates talked potential fiscal reforms and strategies to reactivate economic activity

 

February 9, 2018 (Investorideas.com Newswire) The leading presidential candidates, Petro, Fajardo, Vargas, Duque, Ramírez and de la Calle, participated in a survey held by Portafolio, a local financial newspaper, in which they were asked about key factors, such as potential fiscal and pension reforms and their strategies to reactivate economic activity growth.

Recall that on Mar-18, the right-wing coalition of the Centro Democrático and Conservative parties will decide on its candidate through a public consultation. Iván Duque (Centro Democrático) and Martha Lucía Ramírez (Conservative) are the frontrunners, while Alejandro Ordoñez has a slim chance, according to several polls.

The leading presidential candidates, Petro, Fajardo, Vargas, Duque, Ramírez and de la Calle, participated in a survey held by Portafolio, a local financial newspaper, in which they were asked about key factors, such as potential fiscal and pension reforms and their strategies to reactivate economic activity growth.

Recall that on Mar-18, the right-wing coalition of the Centro Democrático and Conservative parties will decide on its candidate through a public consultation. Iván Duque (Centro Democrático) and Martha Lucía Ramírez (Conservative) are the frontrunners, while Alejandro Ordoñez has a slim chance, according to several polls.

Iván Duque, a former Senator and long-time servant of the BID, would push for a broad fiscal reform that would include the restructuring of public administration aimed at reducing 'unnecessary government expenses', while considering revenue-related measures, such as the implementation of tech platforms for VAT collection (i.e. electronic invoicing and big data). Moreover, Duque would try to simplify the tax code for companies in order to reduce red tape, while giving exemptions to job-creating businesses.

As for the potential pension reform, Duque would look to eliminate the public (Colpensiones) vs. private competition within the system and the subsidies for high-income beneficiaries, while making the contribution from individuals that are past the age of retirement but still working mandatory. With all this, the retirement age for men (62) and women (57) could stay put, according to the candidate. All this would be accompanied by a strong agenda aimed at fostering formal employment.

For Duque, the main drivers of higher GDP growth rates in the future should be the development of the agroindustry sector through small-scale producers, creative SciTech start-ups and a sustainable and more productive mining sector. Also, the further development of construction and infrastructure would be pursued in order to maintain its positive shock on employment and investment dynamics.

Martha Lucía Ramírez, Duque's rival in the coming public consultation and former Minister of Defense, would go with a three-pillar fiscal reform: i) an expansion of the taxable base accompanied by a reduction in the charge rates, ii) the strengthening of DIAN (the local tax-collection authority) in order to reduce tax evasion and smuggling, along with a temporary amnesty plan for non-declared assets and iii) an austerity and expenditure-efficiency plan by the government.

Regarding activity, Ramírez visualizes an economic model based on broad and universal access to education and stronger SciTech innovation in order to achieve higher productivity. Also, she would aim to narrow the trade balance deficit through higher exports of goods and services (including tourism) and to promote the agroindustry sector, all this while strengthening the legal stability for companies and investment.

Germán Vargas Lleras, the other right-wing candidate and former Vice President of the current administration, would go with revenue-positive, investment-enhancing fiscal reform. Such goals would be achieved through the broadening of the tax base, the reduction of the corporate income tax and the elimination of charges on capital goods acquisitions. All this while cutting the red tape of the regime. This should foster the competitiveness of all-scale enterprises in the country. Thus, Vargas's goal is to strengthen productivity and stimulate investment in order to achieve an increasingly-formal labor market. The sectors that would carry the burden would be the agricultural, tourism and manufacturing sectors, while Vargas would still favor the support on housing construction (both rural and urban) and the financing of infrastructure (specially 4G) and oil-mining projects.

Like Duque, Vargas wants to eliminate the public vs. private competition in the pension system and to cut the support for high-income beneficiaries, instead focusing on the low-income population. He is keen on an automatic-adjusted system regarding the retirement age, one that is in line with the evolution of the demographics of the country.

The chief negotiator in the peace process with FARC, Humberto De la Calle, would seek to boost fiscal revenues in the short term through the elimination of exemptions on the income tax (for both corporations and individuals) and the expansion of the VAT base. Moreover, De la Calle would restructure the income tax in order to make it more progressive (high-income individuals paying more), while cutting the corporate rate. All this would go hand in hand with a strong international management against tax havens, public spending control and a fight against corruption and tax evasion.

Regarding economic activity, the priority sectors that could change the course of growth would be: agroindustry, tourism, renewable energies and SciTech innovation. De la Calle pointed out that he would prefer not to support specific activities through subsidies.

De la Calle sees pension reform as an urgent factor given the low coverage of the system (below 25%) and its high fiscal burden (4% of GDP). He would seek to foster a current program (periodic economic benefits or BEPS, its Spanish acronym) of voluntary savings for low-income individuals, while maintaining subsidies for minimum-wage pensions. De la Calle does not rule out an increase in the contribution rate.

Gustavo Petro, former Mayor of Bogotá and current left-wing candidate, would push for broad fiscal reform. The main proposals would be: i) taxes on unproductive or inactive large estates, ii) the elimination of exemptions on activities that do not stimulate information networks, the expansion of knowledge, clean energies and non-polluting transportation, iii) tariffs on imports according to their greenhouse gas emissions (during their production or consumption phases), iv) taxes on remittances of profits, and v) increasing royalties and taxes on dividends.

Petro visualizes a productive economy, rather than an extractive one, with the focus on agroindustry and overall agriculture, based on the 'associative property' of the peasants. Manufacturing (especially metalworking and electric transportation), sustainable tourism, infrastructure for education and the production of clean energies would also be fostered.

Sergio Fajardo, the leading candidate in most polls and former Mayor of Medellín and Governor of Antioquia, would seek reform aimed at increasing fiscal revenues through the elimination of 'non-justified' exemptions and the broadening of the tax base. However, Fajardo believes that such a goal could be achieved by proactive management from the national government, including the modernization of DIAN, electronic invoicing and the development of labor and businesses formalization. Thus, a tax reform would not necessarily be in his pipeline.

Fajardo's formula for higher economic growth includes first-order priorities such as education, SciTech and innovation. Moreover, he would support sectors within agriculture and manufacturing with exporting potential, tourism (ecotourism) and 'green growth'.

Finally, Fajardo explicitly said that he would seek pension reform in his first year in office in order to resolve the coverage issue. The reform would be aimed at guaranteeing full access to the public system (Colpensiones), while those with higher incomes would save in the private funds. He did not take a stance regarding the retirement age.

Fajardo and Petro continue to lead in recent voter intention polls. Having said that, blank votes and undecided voters jointly represent more than 20%, leaving significant room for upside for other candidates, particularly right-wing candidates, in our view. In fact, according to the latest Cifras & Conceptos' poll, ~40% of voters have not fully decided on their vote for the first round yet. In general, we continue to expect that a market-friendly candidate will win the election as the electoral base of the left remains narrow. For more details, please refer to our recently published update on the presidential elections.

For charts, tables and the full report, see the pdf file

Contact:

Daniel Velandia, CFA
+ (571) 3394400 ext. 1505
dvelandia@credicorpcapital.com

Camilo Durán
+ (571) 3394400 ext. 1383
caduran@credicorpcapital.com


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