The plunge in oil prices has challenged Colombia’s good track record on managing publicsector accounts. The recent decrease in public revenues (see Chart 1), is even more eyecatchingsince Brent crude prices have risen by 28.6% YTD in 2017, compared to the averageon H1 2016. The negative nominal growth of tax collections during the first half of 2017, whichhas driven the public sector gap to near -4% (Chart 2), suggests other drivers are at play.    Poor fiscal performance suggests that the risk of a downgrade is still looming, even though thegovernment has reinforced its commitment to austerity. The country is expected to increase thetarget for its fiscal shortfall again before year-end (we forecast 4.2% of GDP from the budgeted3.5%), which would likely raise doubts about the feasiblity of the 2018 budget plan.    The announced 2018 spending cuts of roughly 1% of GDP (Chart 3), are all to come frominvestments, which could be difficult, given the government’s committments to the 4Ginfrastructure programme and the peace agreement process. Besides, the plan also considersflat levels in primary expenditures items, contrary to the pace of acceleration in transfers andsubsidies seen in the past few years (see Chart 4 and BanRep’s Borrador 1003). To avoid adowngrade, in our view, Colombia will need to tackle the high levels of informality and taxevasion, while addressing structural reforms, especially regarding subsidies and social security.

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