COLOMBIA: Smoke and mirrors
Colombia’s economy is growing healthily, and inflation is low. But a common illness might be hiding behind the figures
Colombias government forecasts that the final numbers for 2012 will put annual growth around 3.5%, while inflation for the year came in at 2%. The government estimates that exports were $60.6 billion last year, with a trade surplus close to $5 billion; foreign direct investment (FDI) was $16 billion, up from $14.5 billion the previous year, and unemployment was close to 9.5%.
Authorities and analysts should be pleased, but instead there is growing concern that the positive numbers could create conditions for a long bout of Dutch disease (or resource curse). The reasons are also found in the statistics.
GDP growth was solid in global terms, but two points below the 2011 number and the lowest in the Andean region, where Peru led the way with growth at 6.3%. Inflation, on the other hand, while the lowest in the Andean region, was at the bottom of the 24% range set by the central bank. Most of the FDI flowing into the country is going to extractive industries, and unemployment, while finally in single digits, is still several points above the regional average.
The result of strong prices for Colombias mineral and oil/gas exports and the inflow of investment into extractive sectors has led to a strong rise in the Colombian peso, which gained more than 25% against the dollar between 2008 and 2012. The government has pledged to reverse the pesos appreciation with a series of new measures. The plans have sent the peso retreating somewhat in February but analysts say much more is needed.
The economy is far from being an economic basket case, but I do think that the government needs to get on with deeper economic reforms to combat the Dutch disease problem, says Neil Shearing, chief emerging markets economist at Londons Capital Economics. Rapid credit growth that we saw in the past couple of years has created a kind of false veneer.
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Another move by President Manuel Santos government has been to make a major push negotiating and implementing free trade agreements (FTA) to help open new markets for Colombian goods. The long-delayed FTA with the US came into force last year, and Colombia completed another marathon deal with the 27-member European Union at the end of December. It also has agreements with Canada and a number of countries in Latin America, and in February completed a trade agreement with South Korea that is now subject to congressional approval. The major outstanding deal is with China.
The central bank last month cut interest rates for the sixth time since June, bringing the benchmark rate to 3.75%, the lowest in South America. Most analysts expect the rate to remain close to this level throughout 2013. Colombia has a credible monetary policy, and the government has not taken its eyes off the ball regarding the pressures for peso appreciation, but improving competitiveness means going beyond the focus on the exchange rate, Erich Arispe, a director of sovereign ratings at Fitch, says.
There is consensus among analysts that Colombia needs to improve its infrastructure if it wants to boost competitiveness. Christopher Ecclestone, an analyst with Hallgarten & Company, says Colombias infrastructure is terrible. There is a big stretch of national territory that is basically inaccessible, making it a tough place for anyone to do business. Arispe says there has been more investment in infrastructure, but that a bottleneck has been in effectively managing concession. There have been delays in the completion of projects, which not only have fiscal costs, but also increase costs for investors in Colombia.
In addition to modernizing infrastructure, the government needs to increase the flexibility of labour markets and create a better business environment by eliminating red tape and cumbersome processes for investment, Shearing says. He believes that the government has plenty of room for a new stimulus package to get GDP to expand at a faster rate.
Capital Economics forecasts growth at 3.5% this year, but Shearing says there is room for much stronger expansion although he disagrees with those who claim the economy should be growing at rates similar to those in poorer Peru: We would start to get worried if it did, because the economy would be growing ahead of itself and there would be a messy ending on the horizon.
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