(Bloomberg) — Colombia and Brazil are both governed by left-wing presidents with ambitious social agendas. Now, neighboring Latin American nations have something else in common: growing investor fears about government finances.
In the first two years of their terms, Gustavo Petro and Luiz Inácio Lula da Silva adopted similar tactics to boost their economies. Each relied on deficit spending to fulfill campaign promises at a time when inflation became a global problem. And they each attacked their independent central banks for raising interest rates, fueling concerns about government interference in monetary policy.
Faced with the need to balance their budgets, both Petro and Lula revealed plans to increase government revenue without cutting spending. None of them announced austerity measures until everything else failed — and in the case of Brazil, it was too late.
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While the peso and real have weakened as fiscal concerns have increased this year, the Colombian currency has so far avoided the panic selling seen in Brazilian markets in recent weeks. In an attempt to avoid this, Colombia’s central bank surprised economists on Friday by slowing its rate-cutting campaign.
Brazil, the region’s largest economy, is now serving as a cautionary tale for other countries struggling to control debt loads that have risen during the Covid pandemic.
With Petro’s government issuing a budget by decree after failing to gain congressional approval for its plans, the Colombian president risks following the same path as Lula.
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“It’s clear that Colombia needs to make more aggressive spending cuts,” said Andres Pardo, strategist at XP Investimentos, in an interview. “Those announced by the government will also be insufficient, as in Brazil.”
The enacted budget is underfunded by 12 trillion pesos ($2.7 billion), or the revenue Petro hoped to raise through targeted tax increases that lawmakers rejected. But that is 40 trillion pesos short of the fiscal adjustment that an independent budget watchdog says is necessary for Colombia to reach its target deficit equivalent to 4.7% of gross domestic product.
With the government now in the second half of its four-year term and looking to bond markets to finance its ambitions, Petro’s management of public finances has come under increasing scrutiny. Although tax revenue has consistently fallen short of expectations, Finance Minister Diego Guevara insists that the administration will take the necessary measures to ensure fiscal sustainability and maintain market confidence.
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“Debt service payments will be much higher than budget investments and this is synonymous with fiscal responsibility,” Guevara told reporters on Friday after the central bank’s decision. “That’s why the markets continue to believe in us and that will be the signal we continue to send.”
However, investors can demand more than promises to support public accounts. Lula triggered a weeks-long market stampede in Brazil after announcing a plan to cut 70 billion reais ($11.3 billion) in public spending, along with tax incentives for low-income families. Even as Finance Minister Fernando Haddad promised restraint, this seemed to confirm fears that his government was willing to continue spending to support families, even if this further fueled inflation and public debt.
