A NEW DAWN

Colombia 2017 | FINANCE | INTERVIEW

TBY talks to Mauricio Cárdenas Santamaría, Minister of Finance and Public Credit, on the positive effects of the peace deal.

Mauricio Cárdenas Santamaría
BIOGRAPHY
Mauricio Cárdenas Santamaría has been the Minister of Finance and Public Credit of the Republic of Colombia since 2012, having served as the Minister of Mines and Energy in the Santos administration. Between 2008 and 2011, he was the Director of the Latin American Initiative of the Brookings Institution in the US. He earned his master’s and PhD in economics from Universidad del los Andes in Bogotá, Colombia, and from the University of California at Berkeley, respectively.

What impact does the ministry see the peace deal having on Colombia's GDP and the overall economy?

The end of FARC as an armed group will boost long-term economic growth. It will reduce the destruction of physical and human capital, enhance confidence, increase productivity, and facilitate social cohesion, among other factors. In addition, honoring the agreement requires investment that will be concentrated on rural development and in regions where capital is scarce, generating economic returns. According to our calculations, which only take into account the fraction of total investments required that can be financed by the National Budget, those two factors would result in an aggregate benefit on economic growth of 0.35pps per year between 2017 and 2031. The cumulative effect of peace due to these two factors could imply, by 2030, a GDP 5.3pps higher than the one resulting from a scenario in which FARC continues to operate as an illegal armed group. One of the most important and positive effects of the agreement is that it will generate a regional convergence process. In fact, estimates show that the regions most affected by the conflict—most of which are also the poorest—will have an economic benefit three times greater than the one expected for the country as a whole. This is the case of regions such as Arauca, Vaupés, Caquetá, Meta, and Guaviare. Estimates indicate that the economic sectors that could benefit the most from the peace agreement are agriculture (1.5pps per year on average over the next 15 years), construction (1.2pps), and civil projects (0.5pp).

How concerned are you regarding the protectionist rhetoric coming from the administration in the US?

The US is Colombia's largest trading partner. US support of Colombia as an ally has been bipartisan, which is why, regardless of the party in office, we expect Colombia and the US to continue having a close and productive relationship. The meeting between President Santos and President Trump is a clear indication of this. In this context, the US-Colombia Trade Promotion Agreement aims to improve the investment environment, reducing tariffs and other barriers to exports, expanding trade, and promoting economic growth in both countries. Recently, the US government expressed its will to renegotiate some trade agreements with economies in which the US presents a deficit in the trade balance. The latter is not the Colombian case; hence, we do not expect modifications in the existing agreement.

What does the ministry view as the primary successes of the tax reform implemented earlier this year?

The tax reform was a substantial effort to modernize the Colombian tax system. The goal was to make the system simpler, more competitive, and improve equality. We accomplished these three objectives. The bill approved by Congress in December 2016 is a comprehensive overhaul of the Colombian tax structure with a long-run perspective, focusing on competitiveness and on effectively controlling tax evasion. Thanks to the reform, tax returns are now simpler, which substantially reduced compliance costs and fully incorporated international accounting rules. In addition, the reform promotes competitiveness by reducing corporate income tax rates and eliminating the wealth tax in an effort to keep increasing formal employment, promote private investment, and boost the economy. Finally, the reform focuses on making the tax system more progressive, making sure that those who earn more pay more, protecting the purchasing power of vulnerable families and providing a level playing field for taxpayers. The approval of the reform reduced uncertainty and enhanced confidence. In fact, all three major rating agencies Fitch, Moody's, and S&P have reaffirmed Colombian rating two notches above investment grade (BBB), and during the first half of 2017 Fitch returned its outlook of the country's debt ratio to stable. The government is now focusing on several key pillars for long-term economic growth: implementation of the peace agreement; execution of the 4G infrastructure investment plan; allocating more resources to education; and continuing with fiscal consolidation.