By Oscar Medina Christine Jenkins From Bloomberg

Colombia is using “creative accounting” to hit its budget targets by using assets from a disability pension fund to finance current spending, according to Bank of America Corp.

In its medium-term financial plan published on the Finance Ministry’s website last month, the government included about 3 trillion pesos ($1 billion) of assets from state-controlled insurance company Positiva Compania de Seguros S.A. among its 2015 revenues. This helps the government to comply with the letter of its fiscal sustainability law, or “fiscal rule”, at a time of falling oil revenue, while saddling itself with longer-term liabilities, said Francisco Rodriguez, an economist at Bank of America.

“It is essentially funding the current budget with pension fund deposits,” Rodriguez said in a phone interview Thursday. “I see that as a significantly negative signal.”

Deputy Finance Minister Andres Escobar said in a phone interview Thursday that regulators had “serious concerns” about Positiva’s solvency, since it was obliged to increase payments in line with increases in the minimum wage. The government sought permission from Congress to take responsibility for its nearly 23,000 pensioners, and in return received the fund’s assets, which had been inadequate to cover its obligations, he said.

“At no point did we look to generate an accounting fiction to comply with the fiscal rule,” Escobar said. “If we hadn’t done this, Positiva wouldn’t have survived.”

Old age pensions don’t suffer from this same vulnerability, since the state provides support if the minimum wage increases by more than the sum of inflation and productivity, Escobar said.

The government has tried to rein in spending this year to meet its fiscal targets after its revenues were undercut by a 42 percent decline in the price of Brent crude in the last 12 months.

Moody’s Investors Service, Fitch Ratings and Standard & Poor’s all cited the fiscal rule, which was passed in 2011, in their most recent upgrades to Colombia’s credit rating. Colombia is rated BBB by S&P and Fitch and Baa2 by Moody’s, the second-lowest level of investment grade with a stable outlook. All three companies rated the South American country investment grade in 2011, and later raised it one level.

The government could have rescued Positiva in a way that was more in tune with the spirit of the fiscal rule, for example by re-capitalizing the fund directly, Rodriguez said. The more the government finds ways to get around the fiscal rule, the less “economically meaningful” it becomes, he said.

Colombia’s fiscal rule targets a structural fiscal deficit of 2.2 percent of gross domestic product this year, falling to 1 percent or less by 2022. The rule targets ever-narrower structural deficits, which exclude the cyclical effects of oil price moves. Central government revenue totaled 126 trillion pesos last year.

The amount of money in the Positiva case isn’t large enough to fundamentally alter Colombia’s fiscal picture, “but it does suggest that there’s enough flexibility in the interpretation of this fiscal rule to allow the government to carry out increasingly creative accounting and therefore to be able to legally comply with the fiscal rule even if on a more fundamental level you’re seeing a deterioration in public finances,” Rodriguez said.

For more on this story go to: http://www.bloomberg.com/news/articles/2015-10-08/bofa-says-colombia-uses-creative-accounting-to-hit-fiscal-target

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