Bogotá — Colombia’s Finance and Public Credit Minister, Ricardo Bonilla, is expecting that the central bank’s benchmark interest rate will remain 300 basis points above inflation throughout 2024. In an exclusive interview with Bloomberg Línea, he also gave details on how a decision was reached between the government, business leaders and unions to determine the recent minimum wage hike.
Bonilla also explained why the initiative of adjusting diesel price was ultimately suspended, and how this decision will affect the Fuel Price Stabilization Fund deficit. Further, he referred to the government’s expectations regarding the Constitutional Court’s decision to declare the non-deductibility of royalties as unconstitutional.
Finally, Bonilla shed light on the government’s new tax reform proposal, in which companies would face a lower nominal rate and in which individuals with incomes over 10 minimum monthly salaries would have to make a higher contribution.
Bloomberg Línea: With the 12% increase in the minimum wage, how challenging do you expect it to be to persuade the Board of the Banco de la República to accelerate the pace of interest rate cuts?
Ricardo Bonilla: We will have to reflect on this, because most members of the bank’s board were expecting that the hike would not exceed 11%. It finally came in at 12%. In other words, it went one percentage point higher, but in practice, it was CPI plus 1.9 percentage points, using November as a reference. So, in actual fact, it was a moderate increase. Business chambers were expecting 11%, closely aligned with the bank, and they hoped to push it up to 11.5%. The labor unions, on the other hand, had lowered their expectation to 12%. There was no agreement, but they were hoping that the decree would come in at 13% or 14%. Therefore, it’s a moderate and acceptable increase, below what was done in previous years if you look at the historical reference.
However, what interests us is not just raising the minimum wage, but rather restoring real purchasing power. There’s no point in a salary increase if inflation devours it within three months. In 2023, we demonstrated that real inflation was lower than the agreed-upon salary increase, and therefore, Colombians gained six points of purchasing power last year. We hope they gain another six points in 2024.
BL: With the scenario you describe, would it be possible for the board to lean towards cutting rates by more than 25 basis points in January?
R.B.: I believe that the situation with the majority of the Board members will be that the January meeting will be closely tied to the January inflation data. It’s likely that not much will be achieved in the January meeting; that is, there might only be a 25-point reduction. However, the perspective is to uphold the spread between the intervention rate and the actual real inflation. If the real inflation by mid-year is 7%, the board will surely continue to lower it to maintain a minimum of a 300 basis points spread.
BL: Most of the market is expecting a year-end rate of around 8% in 2024, but that will depend on a combination of various factors. At what level do you expect to see the rate by the end of the year?
R.B.: It must be noted that there is an inflation is expected to end up at 5%, and the rate being at 8%, that’s where the 300 points of difference come in. The bank will not lower the rate below inflation; it will try to maintain a path ensuring that this spread continues, but the message of lowering rates remains valid.
BL: From which month do you expect the pace of rate cuts to start accelerating to reach 8%?
R.B.: That would imply starting to cut rates from March onwards. There are eight bank meetings in the year where rate decisions are made. I would say that the key one will be the March meeting. There, we could be talking about a 50 basis point reduction.
BL: For that to happen, it would be necessary for fuel price hikes not to have an impact on inflation. How can that be feasible? The price hike has been already done for gasoline, but diesel is still pending.
R.B.: Regarding gasoline, the last price increase has already been implemented. From now on, there must be a monthly resolution that adjusts to the international price, but with some changes, either up or down from COP$20. We won’t have increases of COP$600 per gallon again. Gasoline has already closed the gap, unless there we have an unforeseen circumstance like oil returning to US$100 per barrel.
We still have diesel pending. The major concern, which the president has warned of, is that we do not want to affect mass transport prices, and we do not want inflation to spike due to freight transport costs. It’s about looking, monitoring, and agreeing on things along the way. For now, the president has called for a pause; with gasoline, we finalized one phase, and with diesel, we will pause, because we must consider other issues like the impact of the El Niño phenomenon.
The El Niño forecast has three aspects to examine: 1) If there is any risk of rationing. So far the figures on water behavior and thermal power plants tell us that we have 20 gigawatts of capacity that allow us to consolidate different scenarios, and we wouldn’t have any rationing until May. Additionally, 500 megawatts of solar energy will come in, while 106 megawatts entered in December, and 170 will enter in February, and completing May with 500 new megawatts of solar energy.
BL: Are higher costs in freight transport what concern you about raising diesel prices, or is it the possibility of truckers going on strike?
R.B.: The primary concern is to maintain a good relationship with the transportation sector and ensure that any action taken is a result of negotiation.
BL: Is there an estimate of when we can declare victory over El Niño and definitively say there will be no power outages?
R.B.: The information we receive from the Environmental Ministry and Ideam indicates that the peak of the phenomenon will last until May, and that’s when we need to assess whether we have enough energy capacity to respond. We still have issues with prices, such as tariff option lags and kilowatt pricing in the market. Work is underway on this, and we still need to see if there will be any negative impact on agriculture due to the drought effect. For now, the crops are doing well, and the scenario suggests that we won’t face major difficulties, but the tough months will be April and May.
BL: There has been talk of problems in the construction sector due to high interest rates. Do you have any plans to revitalize this sector?
R.B.: There are two types of subsidies provided by the government: one for the downpayment and another for interest rates. Over 50,000 subsidies are scheduled for 2024. What concerns us is that in 2023, over 50,000 subsidies were granted, and they only served to reduce inventories. This means that the unsold newly constructed homes were actually sold. Therefore, it’s the right time to start building again. We want these 2024 subsidies to go towards new construction.
BL: Employment has been declining compared to 2022, but rising in monthly measurements. How much does this concern you?
R.B.: This reflects the impact of months with more growth challenges, which are reflecting these results. The country has a historical issue in the labor market. We have never been able to maintain a single-digit unemployment rate; it generally has been around the two-digit mark. We aim to stay in the single digits, but that depends on the reactivation of the economy, and 2024 needs to show better growth than 2023. It is expected that the past year closed at 1.2% [growth in employment], and we anticipate an increase to 1.8% this year.
BL: The Colombian stock market has been in the red for four years. Among the proposed alternatives to improve liquidity and attract new players is the suggestion that the government list some of the companies it controls, without losing its status as the majority shareholder. How feasible is this?
R.B.: I would say that the problem with the stock market is structural. Private entities have been withdrawing from the market, and Colombians don’t have much faith in stocks. They believe more in Certificates of Deposit (CDs). We need to find another solution to this problem. Thirty years ago, there were 120 listed companies; today, there are barely 65, and only two are public entities that drive the market. This cannot rely solely on the public market; it should depend on a collective effort from private enterprises.
Private companies must ensure that the market can continue to deepen. Since there isn’t significant market development, it is functioning based on Public Offers of Acquisition (OPA), such as the Gilinski-GEA case. This is where the distrust of Colombians in the stock market lies. Thirty years ago, there were a million investors in the stock market, and we had a population of 30 million; today, there are half a million, and we are 50 million Colombians.
BL: The stock exchanges of Peru, Colombia, and Chile are merging and hope to harmonize regulations and processes by 2025 to launch a unified stock market. How willing is this government to harmonize these rules?
R.B.: That is a topic to be discussed. Colombian investors are already looking more at the Chilean market than the Colombian one. Integration will allow for greater market development; I believe we need to help regulate that.
BL: Are there planned meetings with Juan Pablo Córdoba, president of Nuam Exchange, to discuss what needs to be harmonized and how it will be done?
R.B.: Juan Pablo Córdoba is part of the Autonomous Fiscal Rule Committee, which, among other things, I don’t know why he is there if he has this conflict of interest with the capital market.
BL: There were talks about reviewing the Tax Reform to reduce the burden for companies and increase taxes for very high-income individuals. Is there a scheduled date to present a formal proposal?
R.B.: Our concern is why that article of the reform fell through in 2022. It was heading in the right direction. It increased the taxation on individuals and decreased them for legal entities. That article was not approved, and today we need it.
My intention is to recover it so that legal entities begin to lower their nominal rates, not their effective rates, and that owners start to be taxed as natural persons so they are not grouped together with legal entities. We are going to start discussing this with associations and other stakeholders.
BL: What would be that tax rate for companies?
R.B.: Well, the original article foresaw a progressive reduction from 35% to 30%. Unfortunately, it was not approved. The income tax would increase for those earning more than 10 minimum wages who are grouped together with legal entities. Those earnings six or seven minimum wages don’t have legal entities.
BL: There was talk of a territorial tax reform. Could that article on companies be included there?
R.B.: It can be examined. Legal experts say it is better to separate the two issues, but nothing prevents a territorial chapter from being included in a larger reform. There is indeed a strong demand for the management of the Industry and Commerce Tax (ICA). In 2016, the national single form was authorized; it should have solved the administrative problems of the ICA, but it didn’t happen. Today, we are examining what happened there.
BL: Have you received a response from the Constitutional Court regarding the fiscal impact you claimed for the royalty deductibility issue?
R.B.: There is a procedure for that. We had a deadline to submit the fiscal impact, the court received it, but went on recess and will return around January 10. We should have a response from the court around January 12 or 13, and that response should ask for arguments, for which they will give us about a month.
This means that if these times are met, we will present all the arguments by mid-February, and the court will respond by mid-March.
BL: How is the hole in the Fiscal Savings and Stabilization Fund (FEPC) going, and what do you project for this year?
R.B.: The hole is closing with gasoline, and the diesel hole remains. The projection is a hole of $10 billion in 2024, which will depend on whether adjustments are made or not, and that will be more of a political decision than anything else.
BL: Do you expect an extraordinary dividend from Ecopetrol this year?
R.B.: According to the court’s decision, additional dividends could be expected because if it insists on its decision, then Ecopetrol has some resources that were not foreseen.
BL: In the health sector, they say that the Government’s Plan A is now to break the system to force the reform. What would you say to them?
R.B.: The system is not being broken in a negative way. What it is showing today is that citizens’ complaints have become more evident. It has been shown that the Health Promoting Entities (EPS) do not have control over their information, for example, to discuss the adjustment of the Unified Health System (UPC), only four EPS presented information, and with only four EPS, you cannot make decisions. There is a problem there, but also delays in the processing of appointments, delays in surgical interventions, all of that continues, and that is what we want to resolve.
