(Bloomberg) – Investors in Colombia are trying to measure how radical a government under Gustavo Petro will be when he takes office as president in August.
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The nation’s peso and bonds are expected to fall on Tuesday as markets reopen following a public holiday following Petro’s victory in the June 19 presidential election.
Some of his plans will be relatively simple to implement, such as the dismissal of the management of Colombia’s state-owned oil company. Other proposals, such as taxing wealthy landowners and declaring a state of emergency, will be curtailed by powerful institutions such as Congress and the Constitutional Court.
While financial markets may prove difficult under Petro in Colombia, few investors are betting that it will follow in the footsteps of neighboring Venezuela in hyperinflation, widespread expropriations and bankruptcy.
Here are some of Petro’s main proposals for the economy:
Petro has pledged to suspend new oil exploration contracts. If Colombia continues to produce the crude it already mines, it will have 12 years to manage the transition to a clean energy economy, he said in an interview in January.
Read more: Colombia’s presidential favorite seeks global oil bloc
As president, Petro would have the power not to grant new exploration licenses, but he would have to abide by existing ones.
Most oil and gas producers in Colombia have enough exploration licenses to continue drilling for the next four years, according to Charle Gamba, managing director of Canacol Energy Ltd., which produces natural gas in the country. Gamba said he would expect general activity to slow, but said Canacol could explore and add stocks.
“The suspension of field exploration auctions is likely to reduce private investment in the hydrocarbon sector and could gradually weaken the finances of state-owned energy company Ecopetrol,” S&P Global said in a report released the day after Petro’s election victory.
Petro wants to turn Ecopetrol, Colombia’s largest company, into a producer of wind and solar energy. In an interview last month, he said he plans to lay off most of the company’s board. Given that the company is 88.5% owned by the state, there is not much that prevents it from doing so.
Argon is Colombia’s largest export, and Ecopetrol accounts for 60-70% of the country’s oil and gas production.
Petro said last month that the bank should be run by economists with a wider range of views and criticized recent interest rate hikes.
Halfway through his four-year term, Petros will be able to name two new co-directors. When his election as finance minister is being considered, he will appoint three of the seven-member board. But if someone resigns or resigns for health reasons, he will have appointed the majority of the policy committee.
Petro says he will appoint “people with a background in production” who can move monetary policy to boost output and employment, as well as protect macroeconomic and price stability. She says the bank’s mandate forces it to pursue “social justice” as well as stable prices, worrying some bond investors who fear a weakening of its anti-inflation credentials.
Read more: Petro says Central Bank of Colombia needs new type of board member
The bank’s understanding of the constitution is that its sole mandate is price stability, but that the current 3% inflation target is consistent with other targets, including “sustainable medium-term growth,” said Carolina Soto, a former co-director of the central bank. bank.
Reforming the institution would be extremely difficult, as its structure and functions are set out in the constitution, which cannot be easily amended.
Peter says he wants to declare a “financial emergency” that will allow him to bypass the normal functioning of Congress and govern by decree.
He said the “social catastrophe” of widespread hunger justifies such a move.
A state of emergency allows a government to pass laws and regulations without congressional approval for up to three 30-day periods when there are serious economic, social, and environmental risks.
The constitutional court would automatically have to reconsider these arguments and would be unlikely to accept Petro’s argument that the famine justified the decision by decree and not by congress. This means that his decrees will be “definitely” annulled, said Jose Gregorio Hernandez, former president of the court.
Peter’s other ideas are not so worrying, as he will have to moderate them to get them through Congress, said Luis Fernando Mejia, head of the Fedesarrollo think tank. But trying to govern by decree has the potential to create great uncertainty, he said.
As mayor of Bogota from 2012 to 2015, Peter presided over a modest reduction in the city’s debt. Fitch Ratings boosted Bogota’s credit rating by one notch while in power, boosting Colombia’s credit rating and praising the city’s “good financial performance” and “conservative debt policy.”
However, the cost of insuring Colombia’s debt against default on credit default swaps, a risk-taking instrument, has nearly doubled in the past year as Petro won the polls.
He says he wants to increase contributions to wealthier Colombians and tax large, unproductive estates to promote a fairer distribution of agricultural land. Higher tax revenues will be used to finance social programs and gradually reduce debt, according to Petro.
“We can not completely eliminate the deficit overnight, but we can reduce some points from this deficit, gradually, year by year, trying to be much more financially viable,” he said.
Petros wants to move to a pension system that will be overwhelmingly public and extend coverage to people who have not paid contributions. To do that, he would need to push the idea through multiple votes in Congress where he does not have a majority.
According to his proposals, people earning less than four minimum wages, or about $ 1,000 a month, will contribute to the public system. This is the vast majority of the population and would reduce inflows to the private pension funds, which are one of the largest buyers of bonds and shares in the country.
“Obviously, less resources means less purchasing power” for private pension funds, said Munir Jalil, chief Andean economist at BTG Pactual. “This will make it a little more difficult to finance public debt.”
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