Macroeconomic and external financing vulnerabilities

Building on the analyses in chapters 3 and 4, this section focuses on quantifying other external vulnerabilities that the Colombian economy is facing, i.e., its exposure to other global economic dynamics. In a context where fiscal pressures have been aggravated by uncertainties related to the pandemic, inflation, and supply chain disruptions, this chapter addresses through various empirical scenarios how a credit rating downgrade (change in country risk perception) and the Evergrande bankruptcy could further impact Colombia's ability to finance its energy transition by raising borrowing costs and dampening investment and consumption. The simulation results indicate that a 120 basis point increase in the EMBI could lead to a decrease in GDP growth (lowering it from an expected 3% to 2%). Additionally, investment could fall by 0.5 percentage points and inflation could slightly increase from 3.0% to 3.05%. The country's international reserves are also expected to decrease by 1.5% long-term, reflecting the deterioration in Colombia's external accounts as a result of the need to finance the increase in the fiscal deficit. The simulation results therefore emphasise the necessity of sustainable financing mechanisms to support the energy transition. Policy options, including carbon taxes and green bonds, are discussed as viable strategies to mobilise resources for green infrastructure, enhancing fiscal stability and attracting foreign investment. Ultimately, the chapter shows that securing fiscal stability is vital for instilling confidence in international markets, mitigating risks, and fostering economic resilience.