Colombian peso, stocks fall after withdrawal of tax plan

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(Added peso closing, Moody’s comment)

By Nelson Bocanegra

BOGOTA, May 3 (Reuters) – The peso, public debt and Colombian stocks depreciated on Monday after President Ivan Duque withdrew a tax reform proposal considered important for the country’s fiscal stability, raising uncertainty in the market and comments from the rating agency Moody’s.

Duque withdrew the proposal on Sunday after strong opposition from lawmakers and deadly street protests, but said tax reform was still needed and that a new proposal would be made with consensus among business leaders, political parties and civil society.

The withdrawn proposal, initially intended to generate more than $ 6 billion in revenue, would have increased taxes paid by individuals and businesses, increased sales taxes and eliminated exemptions and deductions.

The Colombian currency fell 1.38% to a six-month low of 3,804.95 pesos per dollar. Since the tax proposal was sent to Congress on April 15, the peso has depreciated 5.34%.

Public debt securities due September 2030 were trading at a yield of 7.25%, compared to a yield of 6.92% in the previous session, while the country’s main stock index, COLCAP, fell by 1.00%. 69%.

Market participants said a lack of clarity as to when the new proposal would be ready and how much it would seek to raise has created doubts as to whether the plan could be approved before the end of the legislative session in June.

The delays would make it more difficult to send a message of fiscal consolidation to investors and rating agencies if the Andean country hopes to avoid a downgrade in its ratings.

“In terms of markets, we believe that withdrawing the tax reform proposal will increase volatility, and this could steepen the yield curve even more and lead to further depreciation of the COP (Colombian peso) in the short term until that President Duque present the new proposal, “said Sergio Olarte, chief economist at Scotiabank in Colombia.

The withdrawal of the tax proposal is negative from a credit point of view because of the uncertainty it creates over the government’s ability to pass medium-term fiscal consolidation measures, said Moody’s analyst Renzo Merino.

The rating agency will examine what led it to assign the country a negative outlook last year, Merino said, with particular attention paid to the outcome of the debate on possible tax reform.

Preserving the credit rating will be an uphill battle, but gaining stakeholder support, including testing a shift in the tax burden to businesses, could be the way forward, said Alejo Czerwonko, CFO of Emerging Markets Americas at UBS Financial. Services Inc.

“We expected tough negotiations in Congress. The economic, social and political environment was difficult for the approval of a reform that ultimately yields the required net savings,” Czerwonko said.

Even if a new tax proposal is ultimately approved, it would likely generate less revenue than the government initially sought, said Andres Pardo, chief macro strategist for Latin America at XP Investments.

“The government will have to include other tax increases in a new bill – several of which are not of its preference – which will not be enough to compensate for those that have been rejected,” Pardo said.

(Reporting by Nelson Bocanegra in Bogota; Additional reporting by Rodrigo Campos in New York; Writing by Julia Symmes Cobb; Editing by Will Dunham, Andrea Ricci and Paul Simao)

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