Colombia Peace Deal Seen Clearing Way for Bill to Increase Taxes

  • Voters to approve or reject deal in plebiscite on October 2
  • Fitch put Colombia’s rating on negative watch last month

Colombia’s long-awaited peace deal is set to end five decades of fighting with the the Revolutionary Armed Forces of Colombia. It may also clear the way for what analysts say is a badly-needed tax increase.

The peace agreement, announced Wednesday night, still needs to be approved by the public via a plebiscite on Oct. 2. Investors expect that soon after the government will turn its attention to the tax bill, which would boost revenue in the face of low oil prices. Colombia’s peso rose for the first time this week on Thursday, leading emerging-market gains as it strengthened 1.5 percent to 2,897.58 per dollar at the close of trading.

Finance Minister Mauricio Cardenas said Wednesday that the government is targeting a timeline for the bill that’s in line with tax reforms in years past, and cited efforts in 2012 and 2014 that got underway in October of those years. Moody’s Investors Service senior analyst Samar Maziad said that while the peace deal was positive for the country’s creditworthiness, “the approval of a structural tax reform later this year is critical to contain pressure on the fiscal accounts.”

“The tax reform should be a bigger deal for the markets than the peace agreement, in our view,” Citigroup Inc. analysts led by Dirk Willer wrote in a report. “The political efforts to get it approved will probably start after the referendum results are known.”

Fitch Ratings changed the outlook on its rating for the country to negative last month and warned that it needs to pass tax changes to boost government revenue.

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