By Helen Murphy and Nelson Bocanegra
BOGOTA (Reuters) - For some, Colombian Finance Minister Alberto Carrasquilla's stark warnings of the "monumental challenges" facing government finances are a calculated gamble to push through unpopular tax reforms.
His tone ruffled feathers when he took office in August as part of new President Alvaro Duque's centre-right cabinet.
But many investors are growing concerned that his assessment may come to fruition - putting the nation's investment grade credit rating at risk - unless deep structural changes are made.
His predecessor, Mauricio Cardenas, left saying the worst was over for Latin America's fourth-largest economy and government finances were on the right track as oil prices improved.
Carrasquilla, who served as finance minister between 2003 and 2007 under former President Alvaro Uribe, poured cold water on that. He said next year's budget was underfunded by about 25 trillion pesos (6.24 billion pounds) - 10 percent of the 258 trillion pesos budget.
A swap and bond sale have halved that to $5 billion.
"You can always say the glass is half empty, half full," said Samar Maziad, analyst at Moody's.
"There are problems that if left unaddressed could lead to a weaker fiscal picture so it's helpful to get ahead of these issues ... It's (also) important to reassure investors about the strength of the fiscal reforms."
Moody's revised its the outlook on its Baa2 rating to negative from stable in February. That followed a S&P's decision to downgrade Colombia's credit rating in December to BBB-, one notch above junk, citing concerns over the government's ability to adequately cut the fiscal deficit.
Duque is pressing ahead with a tax reform - known as the financing law and likely to be presented this week - that will reduce business taxes and pile more on the middle class.
Some say Carrasquilla's negative assessment is warranted, and his forthright warnings may be a strategy to lay the groundwork for reforms, not just to taxation but also Colombia's creaking and unsustainable pension system - which the government finances to the tune of $12 billion annually.
"He's highlighting the fiscal challenges. Honestly, I don't think he's over-reacting; the fiscal challenges are there," said Manuel Orozco, a S&P analyst in Mexico.
ANXIOUS OVER RATING
Under multi-year targets, the government must lower the fiscal deficit to 1.5 percent of GDP by 2022 from 3.1 percent in 2018.
Duque's government is anxious to avoid losing Colombia's investment grade. Slipping to a junk rating would bar many foreign investors from holding Colombia's debt and drive up borrowing costs when money is needed to fund post-conflict needs following an end of the war with the Revolutionary Armed Forces of Colombia as well as health and education costs.
However, many economists, including former finance ministry and central bank officials, told Reuters they were baffled by Carrasquilla's stark number, and some complained he did not explain it sufficiently.
ADVERTISEMENT"It's a little confusing and not easy to understand the figure and where it comes from," said Camila Perez of economic think-tank Fedesarrollo, though she agreed the previous government had been too optimistic in its revenue and spending forecasts.
But "to say there's a fiscal deficit of 2.4 percent of GDP is different from saying that the budget is under financed by (8 billion)," she added.
A senior finance ministry official told Reuters that the shortfall comes from social programs that the new government wants but which were not included in the budget sent to congress by Cardenas in July.
The backdrop of a rout in emerging markets is adding to some investors' nerves. While Colombia's $324 billion economy has not suffered like Turkey and Argentina, observers fear that jittery investors could take flight if the uncertainty worsens.
Local Treasury bonds (TES) maturing in 2024 have more than doubled their intra-day volatility and yields have risen to about 6.5 percent from 6.185 percent before Carrasquilla took office on Aug 7.
ADVERTISEMENT"The main risk is that, for example, the financing law doesn't pass and the minister's somewhat alarmist communication scares the market and they start selling TES, which up to now how been slow," said Sergio Olarte, chief economist at BTG Pactual, one of the market makers that buys domestic debt.
DIFFICULT REFORMS
The full terms of the tax reform have not yet been presented to congress, creating time pressure on getting it approved by a divided legislature before year-end.
Discussion also comes amid a push by the left-wing opposition in congress for Carrasquilla's resignation for alleged corruption during his first stint as minister, which has delayed passage of the bill.
ADVERTISEMENTWhile upbeat on Colombia generally, investors like Jacob Jensen, senior portfolio manager at Global Evolution in Denmark, which hold Colombia's local and overseas bonds, also worry tax reform could be diluted.
"For the current administration it might be difficult to implement reforms with a congress more divided than previously," Jensen said.
Andres Lozano, who helps manage $11 billion at Colfondos pension fund, said Colombia's fundamentals remain positive: Inflation is under control, interest rates are low, the economy is recovering and the new government is pro-market.
But he stressed that uncertainty was not helpful.
"Apart from living with emerging market uncertainty due to the Fed rate rise, it's not good to add another ingredient of uncertainty by failing to explain plans clearly," said Lozano, whose fund holds about 30 percent in TES.
ADVERTISEMENTPart of the issue is that the media-shy Carrasquilla has failed to communicate well with the market, investors say. He has shunned reporters and held just two news conferences since taking office.
"Cardenas was very open to talk with investors, with the press, with analysts," said BTG Pactual's Olarte. "Now there's total silence."
(Reporting by Helen Murphy and Nelson Bocanegra; Editing by Daniel Flynn and Cynthia Osterman)
