Investors Wrong to Fear Colombia Regional Overhaul, Advisers Say

(Bloomberg) -- Colombia’s most significant constitutional change in three decades will be done in an investor-friendly manner that won’t blow out the budget deficit, according to two key advisers behind the plan.

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The reform would dramatically increase transfers from the treasury to regional governments. However, aides to Interior Minister Juan Fernando Cristo argued this will be fiscally neutral since the central government will shrink as cities and provinces take on more of its spending responsibilities.

Were the law to be approved in its current form, transfers from the central government would rise more than half to 39.5% of central government revenue by 2040. Fears that this is unsustainable contributed to a selloff in Colombia’s sovereign bonds and currency in recent days as investors fret it could further widen the deficit with the government already struggling to meet its fiscal targets.

These concerns are unfounded, Cristo advisers Daniel Castellanos and Carlos Prada said Friday during an interview at Bloomberg’s office in Bogota.

“It deeply hurts me that the bill is being attacked, saying that it undermines fiscal sustainability,” said Castellanos, a former executive at Colombia’s banking association. “This bill could have defects, but that’s not one of them.”

The true goal of this reform is to overhaul Colombia’s highly centralized government structure, Castellanos said. It would be the most important amendment since the nation’s constitution was passed in 1991, he said.

The bill is expected to be approved before the end of the year, since it now only needs to pass in the Lower House, where President Gustavo Petro’s government has a majority. If that happens, congress would then have two years to discuss another bill detailing new responsibilities for regional authorities.

Castellanos and Prada said it that regional governments could play a greater role in regional road maintenance, the provision of drinking water and assistance to victims of conflict.

“The country is going to change its organization as a state,” said Prada, a former official at Colombia’s Planning Ministry and its statistics agency. “We are proposing that the central government shrinks and the regions grow.”

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Castellanos said the government has failed effectively to communicate the bill’s benefits, including to investors who are sensitive about the fiscal outlook.

“If Colombia’s credit rating deteriorates and everyone expects a fiscal crisis, then let them anticipate it for the right reasons,” he said. “This is not contributing to that crisis.”

Finance chief Ricardo Bonilla has called on lawmakers to curb the costs of the bill and extend its implementation over a longer period.

The constitutional change doesn’t require Bonilla’s approval. However, congress will also need to pass a supplementary law laying out which responsibilities regional governments would assume, and the the ministry could potentially veto this if it believes it to be fiscally reckless.

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