Government deficits remain large despite the recent approval of a historic tax reform, as well as restraints on non-interest current spending and a temporary tax amnesty that raised additional revenue. Rising public debt and high interest rates imply growing debt-servicing costs for the public budget. The government projects that the deficit will continue to rise to 6.5% and 6.9% of GDP in 2020 and 2021, respectively. Consequently, full implementation of the fiscal reform is necessary to restore fiscal sustainability in the medium term. Reforms to streamline the organisation of the public sector would generate additional savings, improve public services delivery and help decrease inequality. Monetary policy has appropriately become more accommodative, with multiple interest rate cuts. The central bank is expected to continue to provide support to growth, given the limited room for a fiscal stimulus and widening slack.
The financial system is considered by the authorities to be sound, but nonetheless faces a number of vulnerabilities. State-owned banks are heavily exposed to sovereign debt and to state-owned enterprises, which creates risks of adverse feedback loops. Heavy dollarisation also poses challenges linked to currency mismatches. Publishing stress test results for individual banks would boost the effectiveness of the exercise and increase transparency. Continuing to improve corporate governance in the large state-owned enterprise sector and simplifying the current regulatory framework would help boost public sector efficiency, increase competition and reduce prices. Enacting a deposit insurance scheme, covering public and private banks, is key to buttress financial stability, protect all depositors and encourage more competition in the banking sector. Announcing the calendar of monetary policy meetings in advance would further enhance central bank communication and monetary policy effectiveness. Recent reductions in social security contributions for small companies will help curb informality, but further simplification of the still complex minimum wage structure is needed to facilitate compliance and job creation.
