Colombia: Constitutional reform warning raises political, regulatory uncertainty
President Gustavo Petro has opened the door to calling a constituent assembly for amending the constitution. He sent the warning in light
of the challenges he faces in securing Congressional approval for his proposed reforms in the health and pension systems.
Although the prospects of him calling the assembly appear slim at a first glance, the warning will cast a shadow over private investment
and may amplify market concerns on the country’s fiscal landscape.
Implementing a constituent process through traditional means seems challenging. Should Petro choose to proceed with this
initiative, he would need to navigate two hurdles:
Proposing a bill to convene a constituent assembly requires a majority vote from both the Lower House and the Senate.
Following Congressional approval, a plebiscite must be organized, and the bill must get the backing of a third of the electoral roll.
There’s a risk that the government could broaden the constituent assembly’s agenda to include other issues, such as security, to garner
support from political extremes. However, the likelihood of executing this traditional route still appears low at this stage.
Petro’s push for constitutional reform is a response to Congressional resistance to his proposals on health and pension systems, casting
serious doubts on his ability to secure approval for an even more significant undertaking, such as a constitutional amendment.
An attempt to emulate Chile? The 2019 social unrest in Chile compelled its political system to consider constitutional reform as an
institutional resolution to the crisis. There’s a risk that President Petro might aim to mobilize public to pressure legislators. However,
considering the president’s current unpopularity, including recent protests against him, the efficacy of such a strategy remains uncertain.
A threat with negative consequences: Despite facing obstacles, the proposal may adversely impact the economy in two ways:
The warning by the president indicates a shift towards radicalization in the face of opposition from Congress and dwindling
popularity. The change bodes ill for fiscal management, as increasing public expenditure remains one of the few available options.
The move heightens political and regulatory uncertainty, posing downside risks to our below consensus growth forecast of 1% for
2024 (see Colombia: Short- and medium-term growth challenges, 28 February).
Limiting the pace of the easing cycle: The constitutional reform threat may exert pressure on the exchange rate, prompting the central
bank to exercise caution in the monetary normalization process. While this may not prevent the central bank from reducing the policy rate
by 50bp in March, it could delay market expectations of a 75bp cut that the market had started to anticipate for future decisions.
The central bank’s board may also be wary that aggressive interest rate cuts might be perceived as government interference, likely
prompting them to tread cautiously.