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Emerging Markets

A question of confidence

Colombia’s fundamentals may be relatively robust, but too much optimism could do more harm than good

Colombian authorities are confident that an anti-crisis economic package, particularly the $22 billion investment it proposes for infrastructure projects, will offset a drop in export earnings and tax receipts, as well as increase investment flows despite the global economic contraction. Under the plan, the state would invest approximately $10 billion in infrastructure projects, with private investors putting up $12 billion to build everything from roads to new schools.

But Colombia’s government is under increasing pressure to revise down its 3% growth forecast for 2009 as the global economy lurches from bad to worse.

President Alvaro Uribe’s administration maintains there is no need to review the numbers: if any adjustments are warranted, officials say, they won’t be made until final numbers from 2008 and the first quarter of 2009 are compiled.

Rolling out the investment plan is the finance ministry’s top priority. In an interview with Emerging Markets, finance minister Oscar Zuluaga says: “We are focused on our investment budget. We are going to improve transportation, housing and sanitation infrastructure that will eliminate impediments to economic development.”

Zuluaga says there is no need to talk about forecasts, because the focus right now has to be on “preventing the nation from falling into recession, so the public investment plan is fundamental to boosting employment and economic growth”.

Strong, but ...

Although analysts say Colombia’s fundamentals are robust relative to other developing nations, many are concerned that the government could create problems for itself with an overly optimistic outlook. “Sooner rather than later the government needs to convey a less optimistic growth assumption for 2009 and disclose how it is going to meet the challenges it will face this year,” says Jimena Zuniga, an economist covering Colombia for Barclays Capital. “We believe the government will act with reason and adopt a prudent combination of spending cuts and additional borrowing.”

Besides GDP estimates, Barclays and other analysts see the need to recalculate accounts using a weaker peso. Most analysts agree that the peso is likely to be weaker than the government’s forecast, which will make it more costly for Colombia to service its foreign debt obligations and put additional pressure on the 2009 budget.

There are also questions about the infrastructure programme and whether the injection of capital into the economy will materialize at the rate projected by the government, and if there are adequate mechanisms in place to facilitate rapid investment of resources. Barclays forecasts a 1.1% contraction in GDP this year, while Morgan Stanley puts that number at 1.6%. Colombia’s central bank has also posted figures below those of the finance ministry, saying in mid-March that growth would be closer to 1% this year, while the National Association of Financial Institutions puts growth in 2009 at 0.5%.

The lower projections are based on statistics from late 2008, such as a steep drop in industrial output in November, the last month for which official numbers are available, and projects for exports this year. Export income is expected to fall from $37 billion last year to around $33 billion for 2009. “Like other countries in the region, the economy is being affected by a profound drop in trade. We estimate export prices and volumes will fall in 2009,” says Zuniga.

In the same boat

The other Andean countries face a similar situation as they all depend heavily on the export of raw materials. Around 50% of Colombia’s export earnings are generated by oil, coal and coffee, while in neighbouring Ecuador it is oil, bananas and shrimp, and Peru minerals and fish.

Colombian numbers are not available, but Ecuador posted a trade deficit of nearly $500 million in January and Peru a deficit of nearly $200 million. Like Colombia, Ecuador and Peru also had trade surpluses in 2008.

Colombia also faces the problem of recurring tensions with Venezuela, with which it has the most trade in the region. Venezuela is Colombia’s second largest trading partner after the United States, and trade between the two countries topped $7 billion last year. Relations are good now, but there have been several tense moments in recent years, including a disruption in trade a year ago, and there is speculation that Venezuela’s economy could be facing serious pressures because of low oil prices and ambitious social programmes at home and abroad. “What happens in Venezuela is important, because it is a critical partner. If Venezuela faces real trouble this would have a major impact on Colombia,” says Zuniga.

Colombian authorities are holding out hope that the new US administration might reverse rhetoric from the 2008 elections and move forward with the free trade agreement (FTA) signed by the two countries last year. President Barack Obama and the Democrats have raised objections to the FTA, but newly appointed trade representative Ron Kirk did not come out strongly against the agreement during his confirmation hearing.

Private groups in Washington that monitor trade and other issues with Latin America believe that there is a possibility of a deal to move the Colombia FTA forward this year. John Walsh, an associate at the Washington Office on Latin America, said he would not rule out a compromise to get the FTA through Congress.

“The FTA is fundamental: it will help Colombia increase investment flows and solidify markets for our productive sector,” says Finance minister Zuluaga.

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