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DISCIPLINE INSPIRES CONFIDENCE

Fiscal straitjacket keeps Colombia on the right track

Interview - July 27, 2015

Mauricio Cárdenas Santamaria, Minister for Finance and Public Credit, discuses how the peace process will expand the nation’s socioeconomic development, the impact it will have on business and everyday lives, and the country’s major investment in education and combating tax evasion in partnership with the US.

MAURICIO CÁRDENAS SANTAMARIA, MINISTER FOR FINANCE AND PUBLIC CREDIT
MAURICIO CÁRDENAS SANTAMARIA | MINISTER FOR FINANCE AND PUBLIC CREDIT

The government has stated that one of the benefits of the peace process will be an increasing growth in the economy, which also means an increase in fiscal income. You have mentioned “it is no exaggeration to say that part of the peace will pay for itself with the same dividends that the end of the world would give us [sic]”. How will this happen? How much does the government think peace will cost?

Achieving peace in Colombia will provide us with huge profits, because it will allow us to grow even more. There are countless studies that prove that, with peace, Colombia will be able to grow at least an extra 1% per year. Why? Because it will bring more tourism, it will allow us to expand our agricultural surface, it will bring more investment into the mining and energy sectors. Basically, in the rural areas where the conflict has been an obstacle to our development. That's why we say that peace will pay for itself, because it will bring the commitment for further investment, for reparation to the victims, and for assisting those segments of the population who need it the most. The peace process will demand resources; it's very likely that we will need our own resources and also international financing, but in fact it will be the peace itself what will allow us to cover the financial costs of those commitments.

President Santos has stated recently that he is “looking for a more effective, more strategic, and more communicative administration”. One of the most palpable changes he has made in his second administration was creating the Ministry for the Presidency and the Counseling Ministers. Many people have attributed this to the President's intention of getting Colombia into the OECD. When do you think this will happen, and how is it going to impact the people's every day lives?

The process of entering the OECD is irreversible. Colombia has made great improvements in that direction. We can say that we are actually already half way there, it is very likely to happen in 2016 or 2017. Some chapters are already approved by the OECD and by the Colombian government. We have an excellent macroeconomic policy; we are doing great in matters of tax policies. We are a very open country and comply with all the standards required by the Good Practice Guidance of the OECD. However, there are other chapters where there is still some work left to do, for example in the environmental or labor areas, or in issues related to the structure of corporate governance of the companies where the government is one of the shareholders. We are working on all of these matters. I aspire to finish the process of entering the OECD in the next 12 months. Colombia is going through a very exciting time, the OECD representatives themselves say it, we are definitely on the right track. This is going to be a reality.

The magazine LatinFinance has chosen you as the best Minister for Finance in the region. The election was made based on the opinion of businessmen, analysts and economists. According to the editor-in-chief of LatinFinance, Katie Lanos-Small: “We are stressing the solid growth and commitment of Colombia to control the fiscal deficit under his leadership”. In what sense has your commitment towards fiscal discipline improved international trust in the Colombian economy? Regarding the National Development Plan 2014-2018, will you continue to consider fiscal discipline as one of the main focuses of your policies, or is there any chances of relaxing in order to encourage domestic consumption?

We have a very open economy, very market-friendly and with a great support to the private sector. That is the model we believe in. In order to make this model work and actually pay off, you have to send signals of confidence, and one of those signals is having everything in its right place, to keep the discipline and the fiscal responsibility, and to have a strict control over the inflation problem.

It is also very important to have a very solid and tough financial system, but definitely the main pillar is fiscal responsibility, that is what creates trust in investors and in people as well. There are no surprises here, and that gives credibility to the government's policies. That is the reason why we have stressed the importance of fiscal responsibility through a Fiscal Law, which acts as a straitjacket for us not to deviate from the right track. Basically in this matter Colombia is the exact opposite of populism, which sets us apart, and has given us great results.

Considering the impact that the US economic recovery has had in Colombia, the Buen Gobierno Foundation (Good Government Foundation) and the AmCham have organized a forum, in which it was said that Colombia will seek to double its non-traditional exports to the US, in order to compensate the drop in the oil industry exports. How is the country trying to pursue this ambitious goal? Do you think that Colombia will be able to grow a 5% without oil?

It is possible that the growth won't actually reach a 5% these next few years, due to the significant drop in the oil prices, which now represents 50% of our total exports. This will obviously affect the availability of resources in the oil companies and the level of investment in the sector. It also affects the government's resources, and that is why we have reduced our budget for the next four years. This has a negative impact on growth; it will no doubt be closer to 4% than 5%. To reach that level of growth, we will need the exporting sectors unrelated to the oil industry to be more dynamic. The exchange rate is really beneficial; it has enabled us to regain some competitiveness. We are already noticing prominent growth in exports such as flowers, but other sectors are definitely starting to take advantage of this competitive context as well, which is also coincidental with a recovery in the US economy. We have a FTA with the United States; until now we had not really been able to make the most of it, but we have set ourselves the goal of doubling the exports to the US and I think we can actually achieve this. Since 2010, Colombia has doubled its imports from the US, so now it is time for them to double what they are buying from us.

One of the main pillars of this administration is education. With 29.4 million Colombian pesos, the education budget in 2015 is around 4% of GDP, and for the first time in decades it is higher than the defense budget. What will the government do in order to meet the demands of other equally important areas, such as agriculture and public health?

To govern means to set priorities, and President Santos has set three main pillars for his second administration: to be a more equitable society, to make Colombia the country with the highest education standards in Latin America, and to achieve peace. These priorities must translate into the allocation of budget lines. That is why the education sector has such a large budget, and it will continue this way for many years. We are making huge investments in education, from preschool to colleges, in infrastructure, better offers in scholarships for millions of people, and in improving the quality of education through motivating the teachers. So that is the core of one of the three main pillars of the government. When we talk about equity, we are talking about things such as health and employment, so these areas are receiving a significant amount of resources as well. We have had to adjust to the situation of having less fiscal resources, so we are running a program to make our resources more efficient in order to fulfill our goals on a smaller budget.

The annual meetings of the IFM and the World Bank in Lima, in October, will provide the world leaders with a suitable scenario to discuss poverty and inequality, and to suggest ways for Latin American economies to thrive without having to depend exclusively on commodities. What will Colombia suggest in these forums, considering that it is probably an example in terms of improving these areas?

We have made big efforts in order to make our economy more normal, with lower prices in the basic food basket, and we think we can make that situation last. For that, we need the other parts of the economy to have a good performance as well. We have set ourselves a very ambitious program regarding infrastructure and road investment, called the 4G Program. This will allow Colombia to replace the income from basic products that is not being received because of their better prices. We have been working on this strategy for three years now, so the country can have new leading sectors, sort of like a relay race, where if one area decreases then another grows in turn, and thus making our economy more dynamic.

Colombia and the United States have signed, through Ambassador Kevin Whitaker, the Foreign Account Tax Compliant Act. What is this agreement about, and what benefits does it represent for both countries?

We are holding a head-on war against tax evasion, because evasion harms the lower-income segments of the population. Tax evaders are usually wealthy people who don't pay the taxes that would otherwise help the poor to have a better quality of life, it is a crime that hinders the State's ability to support those who need it the most. To fight against it, we need international cooperation. We have an excellent relation with the United States, and that has helped us sign this agreement for the first time, which will allow us to exchange information between the DIAN, which is the tax authority in Colombia, and the IRS from the United States. Every year on September 30th we will exchange the data of all the bank accounts owned by Colombian citizens in the US, and vice versa.

Despite the economy slowing down, Fitch Ratings Agency has confirmed the BBB grade for Colombia. You also mentioned that the country's growth is higher than the members of the OECD. What is the reason behind this performance in the international projections? For how long can it be sustained?

The Fitch agency itself has said that our economic policies have continuity. Our policies are very consistent through time and well articulated, and include fiscal discipline, inflation control, and a strong financial system. The agency also mentioned that, besides our continuity and consistency, our policies are actually very appropriate to face the current situation of lower oil prices. So we have trust and credibility in the markets, and we know that these are two very important assets for any economy to be successful. We want to take care of that trust, so we do our best to communicate to the people and businessmen in the country everything the government does. That is a very important aspect of our economy, a very solid and reliable economy.

Not long ago, the Stock Exchange organized the Colombia Inside-Out event, which is also conducted in two of the most important cities in the world of finance, New York and London. What is your assessment of that event? What is the importance, in your opinion, of promoting this kind of international events?

We have a very active international agency; we participate in many forums, the World Economic Forum, and the new OECD meetings. We have regular meetings with investors, and of course the Colombia Inside-out event, which is an annual gathering of all the companies present in the Stock Exchange with international investors. It has been an excellent meeting point to talk about the situation of the country, especially to the shareholders of Colombian companies. In our latest meeting, the main topic was the financing of the 4G Program, and one of the conclusions was that the international financial markets are willing to fund the investments made by the private sector. We can finance the license of road building by issuing bonds in the international markets.

You have received awards as a minister from publications such as América Económica, Emerging Markets, LatinFinance, and recently the English magazine The Banker awarded you as “Latin American minister of the year”. What does all this international recognition mean to you? How do they benefit the Santos administration and the people of Colombia in general?

First of all, there is no doubt that these are awards for a team effort, where the President plays a very important role. President Santos was Minister for Finance before; he knows what this position means and has been a continuing support. He is probably the most concerned person in the entire country about the issue of fiscal responsibility, just as he was when he was minister himself, and now as president he has made very important decisions, such as the Fiscal Law or changing the constitution in order to include fiscal sustainability as a right for all citizens. He makes the job of minister for finance a lot easier.

At the same time, this ministry is lucky to have a highly qualified staff, a group of professionals with a vast and very technical knowledge of the matter, and excellent personal resumes. This also makes my job much easier.

And finally, I think that the model we have adopted is actually working. Our model puts a special stress on fiscal responsibility and discipline, the opposite of populism but with redistributive policies. We impose proportionally higher taxes to the wealthier segments of the population, and spend more on those who need it the most. We are not afraid of the word “redistribution”, we are very progressive in matters of allocating state resources, but we are quite conservative when it comes to the macroeconomics. It is like blending together two ideas that used to be considered incompatible; we think that it is the best of both worlds, the best of the more progressive model and the best of the more conservative model of fiscal responsibility.

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