Mauricio Reina is a researcher at Fedesarrollo, a non-profit foundation dedicated to non-partisan research in economics, political science, and public administration.
by Mauricio Reina
BOGOTA – Just five months ago, Colombia’s government was assuring its citizens that they were protected from the international crisis. Now, analysts predict that the economy will barely grow 1% this year, and that is the best case scenario. This bleak forecast marks the end of Colombia’s longest cycle of growth in three decades, leaving the country in the same fragile situation as that of many other developing economies.
Of course, a deteriorating economy is not exclusive to Colombia. Since the middle of last year, the International Monetary Fund has been reducing its projections for growth across Latin America. Last October, the Fund estimated that growth in the region would reach 3.2% this year; now, it says that growth will barely be positive. And, most likely, the worst is yet to come: if the Obama administration does not succeed in stabilizing the United States economy in the coming weeks, Latin America will most likely face even steeper declines.
The good news for Colombia is that it is better off than many of its neighbours. Although projecting concrete figures is a sterile exercise in these worrisome times, most analysts predict that Colombia’s economic performance this year will be inferior to Peru’s, but similar to Chile’s and Brazil’s and better than that of Argentina, Venezuela, and Mexico, a country expected to contract by more than 2%.
This comparatively benign situation reflects Colombia’s relatively favourable macroeconomic conditions. Although the country was never as protected from the global downturn as its authorities claimed, the country benefits from some factors that do help ease the damage inflicted by the international crisis, especially with regard to the availability of foreign currency in these times of restrictions on external financing.
During the past few years, Colombia has become one of the three most attractive destinations for foreign investment in Latin America, allowing it to cover a significant part of its external financing needs this year.
Moreover, remittances by Colombians working abroad grew 8% in 2008, a surprising result when compared to countries such as Mexico and Ecuador, where remittances have fallen.
In addition, international financial markets perceive Colombia’s economy as being fundamentally sound. The current risk premium for government borrowing in international markets is very similar to that paid by Peru and Brazil, and much less than that demanded of Argentina, Venezuela, and Ecuador.
But, while Colombia is not as bad off as some of its neighbours, the country will not be able to pull itself out of the crisis easily.
Unfortunately, the authorities do not have much margin for error in working to counteract the damage done by the international crisis.
The government did not set aside resources while things were going well, and now it does not have the fiscal space needed for an aggressive boost to public spending of the type that many other governments are attempting.
Although Colombia’s government announced a few weeks ago a strategy based on important infrastructure work, its impact will be limited: most of the investment was already in the budget last year, and the officials in charge of public works have consistently demonstrated inefficiency when executing large-scale projects.
Meanwhile, the country’s monetary authorities have much more leeway to boost the economy by lowering interest rates at a time when the threat of inflation is diminishing. In fact, the Bank of the Republic has reduced its interest rates from 10% at the end of last year to 7% at its last meeting in March.
These policies should allow Colombia’s economy to grow – barely – this year, but only as long as the world economy begins to stabilize before the end of the first quarter. If so, the outlook for Colombia is more favourable in 2010 and 2011, when growth should be close to 3%, thanks to inflows of foreign investment, improvements in security, and a better business environment.
But if the international crisis lasts longer than the first half of 2010, all bets are off, and Colombia will struggle to find its economic footing in a region devastated by generalized contraction.
