Publish in Perspectives - Monday, August 1, 2016
Walter Molano: "Like the Energizer Bunny, the Colombian consumer is unstoppable." Here shoppers at the Chipichape mall in Cali, Colombia. (Photo: Chipichape)
Peace process will be hampered by the difficulties currently facing the Colombian economy.
BY WALTER T. MOLANO
There is an air of apprehension, as Colombia prepares to implement the much-awaited peace agreement. Although public support for the peace accords has grown, there remains a great deal of skepticism. How is it that the world’s third best financed terrorist movement, after ISIS and Hamas, will walk away from decades of armed struggle? It helps that no guerillas will go to jail and all will be able to stand for elected office.
Now comes a painful period of reconciliation and reconstruction. There is no doubt that large swaths of former guerillas will turn to criminal activities, and return to the lucrative drug trafficking trade. It’s not even clear that all of the FARC’s blocs will surrender their arms. Nevertheless, those who do not adhere to the tenets of the accords will be persecuted like common criminals. This is a historical opportunity for the country to open its political spectrum and provide more avenues for social mobility. Doing so, would turbocharge the Colombian economy. It would transform the country into a leader of the Andean region, allowing it to become a catalyst for development and change.
Unfortunately, the process will be hampered by the difficulties currently facing the Colombian economy. While some of the countries in the Andean region saved part of the commodity windfall that occurred during the past decade, or used some of the funds to modernize their infrastructure, Colombia frittered it all away through private and public consumption. Sadly enough, it was left with a nasty hangover when commodity prices began to drop at the end of 2014.
Colombia’s external accounts were slammed, with exports plunging 43 percent from 2014 to $30 billion in 2016. The country’s over-reliance on oil was in plain view, with exports down 50 percent y/y in 2016. Coal exports were also off 33 percent and nickel exports were 47 percent lower. Surprisingly, the deterioration in the current account was large, but not to the same magnitude. The current account shortfall went from 5.2 percent of GDP in 2014 to 6.5 percent of GDP in 2015, and it should finish the year at about 5.7 percent of GDP. Colombia’s freely floating exchange regime helped absorb the blow. By devaluing massively, imports reacted in kind, dropping by a third to $41 billion in 2016. Of course, the large devaluation played havoc with import prices. Recent trade pacts have made the country overly-reliant on imported food products.
Therefore, it is not surprising that inflation is now in the 8 percent range. This has forced the central bank to adopt a pro-cyclical monetary policy, given that the inflation rate is almost twice the target, thus raising interest rates in order to keep consumer prices in check.
Despite all of this, Colombia continues to be one of the best performing economies in Latin America. The economy grew 3.1 percent y/y in 2015 and should expand 2.5 percent y/y in 2016. Of the large Latin American economies, only Peru is growing at a faster pace, and it will most likely be tied with Mexico.
The resilient consumer sector is keeping the Colombian economy afloat. Like the Energizer Bunny, the Colombian consumer is unstoppable. A constant demand for housing is keeping the construction sector engaged. The consumer is also becoming more reliant on credit to make up for the decline in commodity income. Fortunately, the massive devaluation has created an import-substitution industrialization effect, which has helped mitigate some of the decline in employment and aggregate income. Still, several high hurdles remain ahead. The drop in oil revenues has left a huge hole in the fiscal accounts. The fiscal shortfall is expected to be about 4 percent of GDP in 2016. If the government hopes to retain its credit rating, it needs to introduce some new fiscal measures, including an increase in the VAT and an overhaul of the tax system. These factors will be a drag on economic activity and hamper the integration process.
Let’s hope that a recent strike by the truckers union is not a preview of what lies ahead. The drivers are protesting the prevalence of outdated trucks that clog the highways and depress freight rates. They are also weighing in against the country’s astronomical tolls, which are among the highest in the world, and abysmal road conditions. The high degree of militancy and violence during the strike was astonishing, as well as the total disregard that the senior leadership had towards the shortage of food, medicine and essential inputs for some industrial products. Hopefully, this is not a precursor of the type of political behavior that lies ahead when the FARC and the ELN become part of the formal political process. If that is the case, the much-awaited peace process will be a short-lived experience.
Walter Molano is head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development.