Colombia facing budget shortfall of nearly $7 billion

An employee counts Colombian pesos in an exchange house, in Bogota

By Nelson Bocanegra

BOGOTA (Reuters) - A collapse in Colombia's tax collection is setting off alarm bells for the market, which says the government will need to contend with an estimated budget shortfall of some 27 trillion pesos, about $6.9 billion, this year.

Finance Minister Ricardo Bonilla has predicted fiscal adjustments in the fourth quarter, but analysts said changes will need to come sooner, lest the country miss fiscal targets or ratings agencies take notice.

Tax collection fell 40.9% in April to $4.83 billion, taking the overall shortfall to about $2.85 billion in the first four months of the year compared to the target.

The DIAN tax agency has already said the country will not meet targeted collection of nearly $2.6 billion from arbitrations during 2024, and a court decision allowing extractive companies to continue deducting royalties from their taxes will also hit public coffers.

"The fiscal situation is worrying, both at the level of spending and of income," said Andres Abadia, head economist for Latin America for Pantheon Macroeconomics. "The economy will have to pay for it."

The government will need to make adjustments in its mid-year fiscal plan in mid-June if it wants to avoid a crisis in investor confidence, analysts said.

The finance ministry did not respond to requests for comment.

Various market sources who spoke to Reuters said the government faces a dilemma when trying to react to lower-than-expected income - should it significantly reduce spending, take on more debt or both?

Either decision would have fiscal effects, they said.

"I think (the changes) will be insufficient," said Camilo Perez, the director of economic studies at Banco de Bogota. He expects spending cuts and the government to increase the issuance of peso-denominated TES bonds.

Many analysts also expect the government to continue debt swaps to extend expiries.

More debt would mean an increase in the fiscal deficit for this year to about 5.3% of gross domestic product, only just complying with the fiscal rule, a 2011 measure that imposes policy constraints to protect public finances.

A deficit of that level would create volatility, with investors uncertain about capacity to control the fiscal imbalance and higher risk premiums and financing costs, analysts said.

"We have not yet completely incorporated the fiscal risk," said Mauricio Guzman, head of investment strategy at Sura Investments, who manages a portfolio of $20.5 billion, with some $2.5 billion concentrated in Colombian public debt.

"Investors will be very reluctant to take on risk until there is more fiscal clarity."

A drastic cut in spending could hit growth, in turn putting pressure on 2025 finances, said Sergio Olarte, head economist for Colombia at Scotiabank.

"They will need to present a super austere budget next year or modify the fiscal rule," he said.

(Reporting by Nelson Bocanegra; Writing by Julia Symmes Cobb; Editing by Stephen Coates)