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Sergio Fajardo a math whiz who doubled debt is favorite to win Colombian election

Mauricio Moreno/GDA via AP

Sergio Fajardo in 2013.
Fajardo took out dollar loans to finance education projects. Debt payments of Antioquia province soared as peso weakened.

By Matthew Bristow

BOGOTA
Petroleumworld 01 12 2018

As Colombian presidential candidates try to outdo each other with pledges to slash taxes, Sergio Fajardo has stood aloof from what he calls the “political bazaar.”

At the moment, I can't promise to cut any tax,” Fajardo, a former mathematics professor currently leading in polls, said in a radio interview last month. “It would be irresponsible to tell Colombia that we'll cut taxes in the condition we're in.”

Fajardo's calls for prudence make him appear to be the only fiscal conservative with a decent chance of becoming Colombia's next president. Yet, a look at his record tells another story. In four years as governor of Antioquia, Colombia's most economically important province, Fajardo more than doubled its debt burden and increased its dependence on loans in foreign currency.

When he left office in 2015, Antioquia's debt had ballooned to 1.4 trillion pesos (about $490 million at today's exchange rate), from 640 billion pesos when he took office, and its fiscal indicators were flashing red. Fitch Ratings put the province on negative outlook for the first time in its history a few months later, while the National Planning Department cut its “fiscal sustainability” ranking.

Fajardo's closest rival in recent polls is former Bogota Mayor Gustavo Petro, a leftist feared by foreign investors, who suspect he might reproduce Venezuela's economic disaster in Colombia. Yet while Fajardo was doubling Antioquia's debt, Petro cut Bogota's.

Fajardo vs Petro

Public debt of Colombia's biggest city and province

Source: National Planning Department

In response to emailed questions, Fajardo's press office said that his administration took on the debt to finance his plan “Antioquia the Most Educated”, under which several hundred schools and colleges upgraded their infrastructure, new branches of Antioquia university were opened, thousands of teachers received training and dozens of “educational parks” were inaugurated.

Fajardo's administration also built 20,000 homes, and brought electricity to 100,000 rural dwellings while taking on debt in a “responsible” manner, his office said.

Currency Risk

Fiscal questions are playing a central role in debates ahead of the presidential election in May, after S&P Global Ratings downgraded the country's rating for the first time in 15 years, to one notch above junk. To stay within the “fiscal rule”, or balanced budget act, the next government needs to cut the fiscal deficit to 1.1 percent of gross domestic product by 2022, from an estimated 3.6 percent last year.

Fajardo needed to borrow to fund a backlog of delayed investments in the region, according to Fitch. In 2013, when a dollar was worth less than 2,000 pesos, he took out a $77 million loan which, even though it was with a local lender, was denominated in U.S. currency. This took advantage of lower interest rates on dollar debt, but increased Antioquia's exposure to currency risk.

He also borrowed $70 million from France's development agency the following year, just as peso was beginning its big selloff. Those decisions came back to bite him when the currency lost more than a third of its value in the 2014-2015 oil price slump, causing the cost of servicing the debt to soar in local currency terms.

“He made some necessary investments in the province, in improving education and access to higher education,” said Carlos Ramirez, an analyst at Fitch Ratings in Bogota. “The stains [on Fajardo's record] were to take on long-term debt in foreign currency, and the rapid growth in debt until it reached the upper limit” allowed to provinces.

Fitch cited the levels of dollar-denominated debt and “absence of currency hedging mechanisms” as the main weaknesses of the province's finances, when it put Antioquia on negative outlook in 2016. The outlook was returned to stable last year, after it undertook a “Plan For Restoring Fiscal and Financial Health.”

Other leading contenders to win the presidency include former Vice President German Vargas Lleras and Ivan Duque, an ally of former President Alvaro Uribe. Both are pledging a to slash corporate taxes, which they say are asphyxiating business, and betting on a crackdown on evasion to balance the books.

Fajardo, who studied at the University of Wisconsin-Madison, says that a crackdown on evasion must come first, and be shown to have worked, before taxes can safely be reduced.

Colombia will hold the first round of presidential election in May, with a run-off vote in June, and the new president taking office in August.


Story by Matthew Bristow; With assistance by Oscar Medina from Bloomberg.

bloomberg.com/ 01 11 2018

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