Colombia’s fiscal issues could hit plastics amid relentless China competition pressures

SAO PAULO (ICIS)–Colombia’s plastics industry is managing to navigate through a turbulent period for the country’s macroeconomics and growing at over 3%, but the cabinet’s fiscal issues and intensifying Chinese imports pose risks, according to the president of trade group Acoplasticos.

Daniel Mitchell added plastics in Colombia can consider themselves lucky as growth over 3% exceeds that of the wider manufacturing sectors as well as the overall growth in the country.

Mitchell said that, while imports into Colombia continue at pace, the country’s exports have showed particularly strong momentum in the plastic chain – according to Acoplasticos, plastic product exports rose 7% while plastic materials exports surged 15%, effectively compensating for weaker domestic market conditions.

Acoplasticos represents the entire plastics value chain, though maintains primary focus on manufacturing rather than commercial distribution activities.

FISCAL POLICY ADDS UNCERTAINTY
Last week, the Colombian government activated an ‘escape clause’ to the so-called fiscal rule, a clause normally only used in emergencies or calamities, the last time being the pandemic.

On this occasion, there is not an emergency per se, but the cabinet is decided to go through with its intention to increase spending ahead of the election.

Left-leaning President Gustavo Petro’s electoral program was clear in its aim to expand the welfare state, but as Petro’s term nears its end, that higher spending has been financed with debt rather than regular, tax-led higher income.

Activating the escape clause and practically dismantling the rules which had made Colombia a relatively stable economy in Latin America in the past few years will add pressure to investors who are wary of unstable macroeconomics.

Chemicals sources said to ICIS last week the measure could increase borrowing costs, as both public and private borrowing became harder due to investors’ distrust of loose fiscal policies.

Industry leaders are showing the same concerns. Last week, the main industrial trade group Andi – in which chemicals is represented as well – said nascent, growing investments in Colombia could now be put on hold due to the uncertainty, and Acoplasticos joins that.

“We are quite concerned. There are three elements that have come together: the cabinet recently increased withholding tax rates, requiring companies to pay higher advance portions of next year’s income tax during the current year. This provides the government with additional, immediate cash flow – but it reduces available resources for the following year: it’s short-termism in a fiscal maneuver which could have profound medium-term consequences,” said Mitchell.

“Additionally, the government has indeed activated the ‘escape clause’ for the fiscal rule, effectively allowing breach of established fiscal discipline mechanisms. This decision permits higher government borrowing and increased fiscal deficits, enabling expanded current spending without regard for future fiscal sustainability.

“Finally, the third concerning element involves publication of the medium-term fiscal framework, outlining public finance perspectives over the coming years. To add to the previous woes, most analysts think this framework reflects a concerning ‘spend today and don’t think much about what will happen tomorrow or in future years’ approach, which greatly undermines confidence in fiscal responsibility,” said Mitchell.

These fiscal policy decisions carry significant repercussions for Colombia’s financial standing and broader economic stability, Mitchell went on to say, and the deteriorating fiscal outlook is almost certain to increase the country risk premiums, which in turn can lead to higher interest rates for public debt and reducing fiscal space for future policy responses.

There are widespread concerns among Colombia economic heads that if the government insists on a looser fiscal policy, credit rating agencies could move to downgrade the sovereign rating, making it more expensive for Colombia to go out to global markets to issue debt.

“There is a risk that credit rating agencies will review Colombia’s rating and possibly remove our investment grade status and downgrade us in their categories. This scenario would further increase interest rates and limit government borrowing capacity while constraining private sector access to international financing,” said Mitchell.

Fiscal discipline – or the appearance of it – is so important and is so absent in Colombia currently that there are concerns the deterioration in the public finances will almost inevitably and quickly depreciate the Colombian peso’s exchange rate, in turn making imports more expensive.

This all will be an issue for Colombia’s central bank, who was meant to continue lowering interest rates as the peak of the inflation crisis has been left behind. But the new scenario of rising imports due to the lower peso, sooner or later filtering down to the consumer in the shops, could put a span in the works of monetary policy easing.

“Obviously, by maintaining or not being able to reduce interest rates, this affects economic growth, affects investment prospects, buying machinery, buying appliances, buying automobiles, buying housing, which are sectors tied to the chemical sector, to the plastics sector,” said Mitchell.

“Currency dynamics present mixed implications for plastics: a depreciated peso increases raw material costs for domestic producers reliant on imported inputs, though it benefits exporters by making their products more competitive in international markets. But, overall, I think currency weakness generally pressures the industrial sector downwards, while economic deceleration reduces domestic consumption.”

CHINA
As well as domestic issues for companies, chemicals and plastics imports from Asia, the Middle East, or the US, continue to present Colombia and the wider Latin America with a near-existential crisis.

With lower production costs – via actual lower costs or via heavy subsidies to keep its citizens employed – China is now dumping its excess product in practically all industrial sectors, and chemicals and polymers have been at the center of it.

Far from easing, China seems to be sending product at yet more competitive prices, and the competitive pressure continues escalating, gradually but persistently, across most plastic product segments.

Mitchell said that while some categories like packaging containers face limited import competition due to transportation economics, virtually all other tradeable plastic products encounter Chinese competition at prices significantly below domestic production costs.

Colombia’s approach to addressing unfair trade practices maintains a case-by-case methodology rather than implementing broad protective measures such as higher import tariffs.

The Ministry of Commerce investigates specific complaints regarding antidumping violations and safeguard measures, with mixed results depending on individual case merits.

Recent examples include a polyvinyl chloride (PVC) antidumping complaint filed two years ago that was rejected by the government, while a current antidumping case regarding plastic films remains under review.

“These cases reflect ongoing industry efforts to address unfair competition, though without systematic government support for broad protective measures – it has ruled in favor in some cases, it has ruled against in others,” said Mitchell.

OPEN ELECTON ALSO ADDS TO UNCERTAINTY
As Colombia approaches a critical electoral period with congressional elections scheduled for March 2026 and presidential elections in May, the political uncertainty seems to grow rather than narrowing the option as the election gets closer.

President Petro’s approval ratings hover around 30%, suggesting his party will face electoral vulnerability for the presidential election, as Colombia’s second-round presidential system requires majority support exceeding 50% in the first round, or a final round between the two most voted candidates in the first round.

However, political dynamics remain highly uncertain with numerous potential candidates and no clear front runner emerging. To add to the uncertainty, Colombians are still reeling from the terrorist attack a week ago witnessed on national television against one of the presidential candidates, right-leaning Miguel Uribe, who remains in hospital in critical condition.

Opinion polls would suggest Petro’s time in politics may be approaching its end, but Mitchell reminded a few months in politics can feel much longer, and more so in a very fluid electoral landscape in which there is no clear favorite yet, with several candidates polling at the low double-digits. The second and final round seems more open than ever.

“When you look at the government’s popularity indices, the logic is that no [they will not revalidate their mandate]. Because his popularity is around 30%, which is not a majority. But obviously everything is very uncertain at this moment, and the truth is that there are many candidates,” he concluded.

This interview took place over the phone on 13 June.

Front page picture source: Acoplasticos

Interview article by Jonathan Lopez