Sensible economics helping Colombia buck regional decline

Friday, November 14, 2014

Colombia remains a bright spot in Latin America, as much of the region struggles to adapt to less favorable external conditions in the form of tighter US monetary policy, lower commodity prices and a slower Chinese economy.

In October, the IMF slashed its GDP growth projections for Latin America and the Caribbean to 1.3% this year and 2.2% in 2015.

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But Colombia has largely been able to buck the downward trend, remaining resilient to external shocks thanks to exchange rate flexibility, strong fundamentals and policy buffers.

As such, the country is expected to grow 4.8% this year and 4.5% next year, compared to expected 2015 growth of 1.4% in Brazil, 3.5% in Mexico and 3.3% in Chile.

With inflation close to the central bank's target range of 3%, and comfortable levels of international reserves, authorities also have ample policy space to counteract the negative effects of any shocks.

Such competent management of the economy, influenced by a fiscal rule that envisages a gradual reduction of the central government's structural deficit over the medium term, has also helped maintain investor confidence, enabling the country to access financing at historically low levels.

Colombia also overtook Chile as Latin America's most business-friendly country this year, according to a World Bank report published in October, thanks to the new regulations.

In 2015, growth will be driven by strong construction activity linked to the government's US$25bn highway plan, dubbed 4G, which is to be executed through public-private partnerships.

The infrastructure program is expected to add an extra 1% to GDP growth and generate hundreds of thousands of jobs.

Local and regional government elections in October 2015, meanwhile, will give projects in the pipeline an extra impulse ahead of potential changes in local government.

Private consumption is also expected to support economic growth next year, aided by historically low unemployment levels (8.4% as of September, according to local statistics agency Dane), thanks in part to a reduction in payroll taxes in 2012.

Foreign direct investment (FDI) to Colombia also remains dynamic.

Despite an overall drop in Latin America of 23% year-on-year in the first half of the year, FDI to Colombia rose 10%, less than only Panama (26%) and Dominican Republic (20%), according to the UN Economic Commission for Latin America and the Caribbean (Eclac).

Nevertheless, as a major oil-producing nation, the recent decline in oil prices and commodities in general poses a significant risk to economic growth.

Commodities account for 85.8% of Colombian exports, with oil representing 65.0%. A 20% commodity price decline across the board would result in a 1.7% decline in the country's GDP, according to a report by JPMorgan.

The government is currently working on a tax reform aimed at generating the resources needed to sustain public spending in the context of this decline in commodities prices.

The ongoing peace process with the FARC guerilla group and the impending tax reform are also sources of uncertainty for local businesses and potential investors.

A successful peace deal with the FARC, however, would contribute further to strengthening confidence in the local economy, providing an additional boost, particularly to the agriculture, energy and tourism sectors.