FILE PHOTO: An employee of the Paloquemao market square works amid inflation reaching the highest figures in years, in Bogota, Colombia October 7, 2022. REUTERS/Luisa Gonzalez/File photo

By Nelson Bocanegra

BOGOTA (Reuters) -Colombia's government has authorized the use of an "escape clause" to temporarily suspend compliance with its fiscal rule, a government source told Reuters on Tuesday, amid deteriorating public finances.

The fiscal rule, established in 2011 by Latin America's fourth-largest economy, imposes limits on government spending and debt to ensure the long-term sustainability of public finances and macroeconomic stability.

The suspension allows the government to raise its targeted fiscal deficit for the year from the previously forecast 5.1% of gross domestic product (GDP).

The fresh fiscal deficit goal is now at 7.1%, market sources told Reuters. Finance ministry officials met with banks and brokers earlier in the day to outline the changes, the sources said.

The finance ministry plans to hold a press conference on Friday to discuss the changes and release its medium-term fiscal framework detailing new financing objectives.

"It's possible that these include piecemeal austerity measures," wrote analysts at Capital Economics in a note. "But the government has a track record of missing its targets by a wide margin in recent years."

The peso currency closed down around 1.45% against the dollar on Tuesday, reaching a four-week low.

"It doesn't look like the deterioration in the fiscal situation has been fully priced in (by the market) yet," the Capital Economics analysts said, adding that sovereign dollar bond spreads could widen a further 30 basis points.

In 2024, Colombia logged a fiscal deficit of 6.8% of GDP, above the targeted 5.6%. While the government maintains that it adhered to the fiscal rule that year, analysts generally disagree.

Last week, Finance Minister German Avila - a close ally of President Gustavo Petro - said that the government would roll out measures including increased borrowing and spending cuts, though he did not provide details.

Colombia's autonomous committee on fiscal rule (CARF) previously estimated that the nation would need budget adjustments of between 40 trillion pesos ($9.74 billion) and 75 trillion pesos ($18.26 billion) to comply with the 5.1% deficit target.

In mid-May, ratings agency Moody's said that Colombia's sovereign credit rating, currently at Baa2, was dependent on the "frank disclosure" of the country's fiscal figures in the forthcoming fiscal framework.

(Reporting by Carlos Vargas and Nelson Bocanegra; Additional reporting by Gabriel Araujo; Editing by William Maclean and Stephen Coates)