Colombian policymakers are trapped or, at the very least, have an incredibly small margin for further error. The Covid-19 pandemic continues to batter the Andean nation’s healthcare system, while rolling lockdowns have weighed heavily on economic activity and, importantly, decimated the fiscal accounts (Chart 1).
A necessary yet exceptionally poorly handled tax-reform proposal to shore up the public finances has been scrapped, all the while unleashing ongoing societal chaos. However, a failure to control deteriorating public debt dynamics will undermine investor confidence in Colombian assets.
Moreover, the real (inflation-adjusted) policy rate is currently negative and simply too low to compensate investors for risk. Unsurprisingly, markets are already beginning to front-run the central bank.
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