(Bloomberg) — Investors in Colombia are trying to gauge how radical a government led by Gustavo Petro will be when he takes office as president in August.
Most Read from Bloomberg
US Futures Gain With European Stocks; Dollar Slips: Markets Wrap
Putin May Win in Ukraine, But the Real War Is Just Starting
Putin Gets Unexpected Pushback From Ally Over War in Ukraine
Housing’s Slowdown Has Economy on the Edge
Giant Cruise Ship’s Maiden Voyage May Be to a Scrapyard
The peso and the nation’s bonds are expected to fall Tuesday when markets re-open following a holiday, after Petro won the June 19 presidential election.
Some of his plans will be relatively simple to implement, such as firing the management of Colombia’s state oil company. Other proposals, such taxing wealthy landowners and declaring an economic state of emergency, will be constrained by powerful institutions such as congress and the constitutional court.
While financial markets may prove rocky under Petro in Colombia, few investors are betting that it will follow the path of its neighbor Venezuela into hyperinflation, widespread expropriations and default.
Here are some of Petro’s main proposals for the economy:
Petro has pledged to stop awarding new oil exploration contracts. If Colombia continues to produce the crude it’s already drilling, it would have 12 years to manage the transition to an economy based on clean energy, he said in an interview in January.
Read more: Colombia Presidential Favorite Seeks Global Anti-Oil Bloc
As president, Petro would have the power not to grant any new exploration licenses, but he’d still have to honor existing licenses.
Most oil and gas producers in Colombia have enough exploration licenses to keep drilling over the next four years, according to Charle Gamba, CEO of Canacol Energy Ltd., which produces natural gas in the country. Gamba said he’d expect general activity to slow, but said Canacol could still explore and add reserves.
“Stopping field exploration auctions would likely reduce private investment in the hydrocarbon sector, and could gradually weaken the finances of government-owned energy company Ecopetrol,” S&P Global said in a report published the day after Petro’s election win.
Petro wants to transform Ecopetrol, Colombia’s biggest company, into a wind and solar producer. In an interview last month, he said he plans to fire most of the company’s board. Since the company is 88.5% owned by the state, there’s little to prevent him from doing so.
Crude is Colombia’s biggest export, and Ecopetrol accounts for 60-70% of the nation’s oil and gas output.
Petro said last month that the bank needs to be run by economists with a broader range of opinions, and has criticized recent interest rate increases.
Half-way through his four-year term, Petro will be able to name two new co-directors. When counting his pick for finance minister, he’ll get to appoint three of the seven-member board. But if someone quits or steps down for health reasons, he’ll have appointed a majority of the policy committee.
Petro says he’ll appoint “people with a background in production,” who can move monetary policy toward boosting output and employment, as well as protecting macroeconomic and price stability. He says the bank’s mandate obliges it to pursue “social justice” as well as stable prices, worrying some bond investors who fear a weakening of its inflation-fighting credentials.
Read more: Petro Says Colombian Central Bank 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 inflation target of 3% is consistent with other objectives including “sustainable medium-term growth,” said Carolina Soto, a former central bank co-director.
Reforming the institution would be extremely difficult, because its structure and functions are laid out in the constitution, which can’t easily be modified.
State of Emergency
Petro says he wants to declare an “economic emergency” that would allow him to bypass the normal workings of congress and govern by decree.
He’s said that the “social catastrophe” of widespread hunger justifies such a move.
A state of emergency allows a government to approve laws and regulations without approval from congress for as many as three 30-day periods when there are severe economic, social and environmental risks.
The constitutional court would automatically have to review these arguments and would be unlikely to accept Petro’s argument that hunger justified ruling by decree rather than through congress. This means they would “certainly” invalidate his decrees, said Jose Gregorio Hernandez, a former president of the court.
Petro’s other ideas aren’t so worrying, since he’ll have to moderate them to get them through congress, said Luis Fernando Mejia, head of the economic think tank Fedesarrollo. But attempting to govern by decree has the potential to generate a lot of uncertainty, he said.
As mayor of Bogota from 2012 to 2015, Petro presided over a modest drop in the city’s debt load. Fitch Ratings raised Bogota’s credit rating a notch while he was in office, after it lifted Colombia’s sovereign rating, and praised the city’s “sound financial performance” and “conservative debt policy.”
However, the cost of insuring Colombia’s debt against non-payment with credit default swaps, a gauge of risk perception, has nearly doubled over the last year as Petro gained in polls.
He says he wants to increase the levy on wealthier Colombians and tax large, unproductive estates to promote a fairer distribution of agricultural land. Higher tax revenue would be used to fund social programs and gradually cut debt, according to Petro.
“We can’t eliminate the deficit completely from one day to the next, but we can shave some points off this deficit, gradually, year after year, trying to have finances that are much more sustainable,” he said.
Petro wants to move toward a pension system that is overwhelmingly public, and expand coverage to people who didn’t make contributions. To do so, he’ll need to push the idea through multiple votes in Congress where he has no majority.
Under his proposals, people earning less than four minimum wages, or about $1,000 per month, would contribute to the public system. This is a large majority of the population, and would slash inflows to private pension funds, who are among the biggest buyers of the nation’s bonds and stocks.
“Obviously, fewer resources means less purchasing power,” for the private pension funds, said Munir Jalil, Andean chief economist at BTG Pactual. “This will make it a bit harder to finance government debt.”
Most Read from Bloomberg Businessweek
Ethereum Mining Is Going Away, and Miners Are Not Happy
Hell Is a Cruise Ship at the Beginning of the Pandemic
Sheryl Sandberg’s Wedding Expenses Are the Least of Facebook’s Sheryl Sandberg Problems
Adults Who Love Toys? The Toy Industry Loves Them, Too
©2022 Bloomberg L.P.