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June 15 (Bloomberg) -- Colombia’s Congress approved legislation yesterday to allow the Andean nation to capitalize on a boom in oil and mining investment to reduce debt and build a stabilization fund to cushion the economy during downturns.
The Senate bill passed yesterday, which still must be reconciled with a version approved in May by the lower house, targets a central government budget deficit of no more than 2.3 percent of gross domestic product in 2014, down from a projected 4.1 this year. It also seeks to narrow the gap to no more than 1 percent by 2022.
Colombia is counting on surging foreign investment in mining and energy to boost annual economic growth to 6 percent and reduce its debt burden. Stricter fiscal targets may win Colombia further upgrades to its credit ratings. Fitch Ratings said it would wait for approval of the so-called “fiscal rule” before considering whether to join Moody’s Investors Service and Standard & Poor’s and raise the country’s credit rating to investment grade.
“This is basically a good aim toward correct fiscal behavior,” said Finance Minister Juan Carlos Echeverry after the approval.
The bill also creates a dollar-denominated rainy day fund, modeled on one in Chile, which will save excess mining and energy revenue overseas. Keeping the investment out of Colombia will limit gains by peso, the best-performing currency in Latin America this year.
The Senate version of the bill calls for a reduction of the deficit to no more than 2.3 percent in 2014, 1.9 percent in 2018 and 1 percent or a surplus by 2022. The lower house version seeks a deficit of no more than 2 percent from 2015.
The peso fell 0.4 percent to 1,779 per U.S. dollar at 9:15 a.m. New York time, from 1,771.4 yesterday. The yield on the nation’s 2024 peso bond was little changed at 7.89 percent.
While Colombia was slower to emerge from the global recession than its Latin American neighbors, growth this year is expected to exceed the pace achieved by Mexico and Brazil, the region’s two biggest economies. After growing 4.3 percent last year, the government forecasts growth of as much as 6 percent this year.
President Juan Manuel Santos, who took office in August, has vowed to maintain that pace in coming years, fueled by foreign direct investment that the Trade Ministry says will reach about $13 billion a year by 2014.
Most of the investment is tied to mining and energy as Colombia aims to expand oil production to 1.7 million barrels of crude a day in 2020, up from 903,000 currently.
“This guarantees Colombia will have a sustainable and constant path of growth in the coming years and that we don’t spend what we don’t have,” said Andres Jimenez, head of international sales for Interbolsa SA, Colombia’s biggest brokerage. “The fiscal rule is the beginning for Colombia to climb rapidly up the investment grade ranks so that we are graded A and above.”
Moody’s rates Colombia Baa3, the lowest level of investment grade, while S&P has a BBB- rating on Colombia.
To ease pressure on the peso, which has strengthened 7.4 percent against the dollar this year, the extra revenue will be stored overseas along with dividends from state oil company Ecopetrol SA.
The fund, to be administered by the central bank, may invest in financial assets including Colombian foreign debt purchased in the secondary market, and may also be used to pay interest on debt when needed.
While Santos’s government has stepped up efforts to curb the peso’s rally, Echeverry and central bank President Jose Dario Uribe have said that so far capital controls like ones used in Brazil aren’t needed.
Santos, a former finance minister, had promised during his campaign to balance the budget several years earlier though heavy rains this past year forced an increase in spending to rebuild washed-out roads and provide shelter to millions of flood victims.
Congress last week passed a law to modify distribution of taxes on commodities production to allow a greater swathe of the nation to benefit from rising revenue and the accumulation of savings.
The Colombian fiscal rule is modeled on one in Chile, which saves some of its income from copper sales for years when economic growth slumps and to ensure the nation isn’t as vulnerable to swings in the price of copper, which makes up 53 percent of exports.
The funds helped the Chilean economy withstand the 2009 recession and provided some of the financing to rebuild after the 8.8-magnitude earthquake last year that caused almost $30 billion in damage.
--Editor: Joshua Goodman
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