Colombia's return to investment grade status, healthy economic growth and a safer and more stable environment would have meant smooth sailing for the South American country if it were not for the political infighting that is stalling key economic reforms, ...
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Colombia's return to investment grade status, healthy economic growth and a safer and more stable environment would have meant smooth sailing for the South American country if it were not for the political infighting that is stalling key economic reforms, including tax changes.
Last year, the three major ratings agencies lifted Colombia's credit rating to investment grade for the first time since the country fell to junk bond status after an economic crisis in 1999. Since then, the government has succeeded in cracking down on drug trafficking and drug-related crimes, leading to increased stability. The country's economy grew by 5.9% in 2011 and while growth is expected to slow in 2012, it is still forecast at a respectable 4.5% rate. But, while President Juan Manuel Santos's coalition government enjoyed support from former President Álvaro Uribe and his allies, a failed judicial reform has shifted loyalties.
"A botched attempt to reform the justice sector has thrown Santos' reform agenda into disarray, delaying changes to the pension and tax systems that are seen as key if Colombia wants to move up the investment grade ladder," Reuters reported.
The reform, which Santos announced in March 2012, is an ambitious one aimed at closing loopholes and transforming the tax system into a more balanced and efficient one.
"Some 800 of the [tax] code's 1200 items are under scrutiny," reported The Economist.
"Many of the proposed reforms would dismantle tax breaks and incentives for specific industries instituted by Mr. Uribe […] The mining, tourism and oil sectors, which have boomed with the help of those incentives, are particularly wary of what the new reform may bring."
A resurgence in attacks by guerrilla group Revolutionary Armed Forces of Colombia (FARC), has also hurt Santos's popularity, Reuters said. In an effort to shake things up, President Santos in late August–two years after securing a sweeping victory into office–asked all of his 16 ministers to resign so that he can proceed with a cabinet reshuffle.
Finance Minister Juan Carlos Echeverry was the first to resign and was replaced by the energy minister Mauricio Cardenas, an economist.
"It is true that there is a lot of uncertainty in Colombia right now given the fact that the country is expecting substantial tax reform," said Jaime Vargas Cifuentes, Baker & McKenzie's tax leader. "But no one really knows when it will happen and to what extent considering the tense situation between Congress and the president."
Whether the country will manage to capitalise on its achievements will depend on whether Colombia's politicians are willing and able to overcome the stalemate or if they will continue to dig in their heels until the 2014 presidential election.
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