Publish in Perspectives - Wednesday, April 14, 2021
Thanks to high oil prices, U.S. dollar inflows will be materially higher in 2021 as compared to 2020, and those flows will generate very positive ripple effects through the economy, experts say. (Photo: Colombia's Energy and Mining Ministry)
How quickly will Colombia see an economic recovery?
BY LATIN AMERICA ADVISOR
Colombia’s economy shrank 6.8 percent last year amid the Covid-19 pandemic, Colombia’s statistics agency said last month, in line with an earlier government forecast and slightly less severe than private analysts had expected. Construction was among the sectors hardest hit last year, contracting 27.7 percent. However, the president of the Colombian Chamber of Construction, or Camacol, recently said the sector is poised to lead the country’s economic recovery. How soon and how robustly will Colombia’s economy bounce back from the pandemic? Will the construction sector indeed be among the top drivers of growth this year in Colombia? Which other sectors will help lead Colombia’s economic recovery, and which will struggle?
Renzo Merino, vice president and senior analyst in the Sovereign Risk Group at Moody’s Investors Service: Colombia’s economic contraction of 6.8 percent in 2020 was slightly better than Moody’s estimate of 7.2 percent. In part, this reflected a stronger-than-expected performance of the economy in the last quarter of the year as various sectors’ activities reopened. Moody’s forecasts growth in 2021 of about 4.5 percent to 5 percent, driven by a rebound from last year’s low base and the beginnings of a stronger recovery toward the second half of 2021 as the vaccination process progresses in the country. Prior to the pandemic, Moody’s had expected Colombia to maintain trend growth of about 3.5 percent over the coming years supported by robust domestic demand, and in particular higher investment. These dynamics will likely restart in late 2021 and into 2022 as the government implements its economic recovery plan, which hinges on higher public investment. If private investment restarts as well, we expect it could boost construction activity in the country and lead to still-strong growth in 2022, when Moody’s forecasts 4 percent growth. Strong economic growth in 2021 and future years would be very important to allow Colombia to revert some of the deterioration that the pandemic caused in the government’s fiscal profile. A fiscal reform and other policy announcements this year will set the conditions for the consolidation process that will start next year. Ensuring that changes to the government’s revenue and expenditure structure supports inclusive growth will be key to address rising social tensions. Additional measures that could support higher potential growth by enhancing Colombia’s productivity and competitiveness would be important as well.
Alberto J. Bernal, chief emerging market and global strategist at XP Investments: Colombia will show strong growth in 2021. Our team at XP Investments expects the economy to expand 5.5 percent this year. The sources of positive growth are various. To start, growth in 2021 will be a function of simple mathematics. The country was practically shut down in last year’s second quarter, and for some months in the first and third quarters, so because the country will no longer be closed in those same periods in 2021, growth will necessarily print very high numbers. For example, industrial production fell 35.8 percent and 26.2 percent year-on-year in April and May 2020, respectively. With very high certainty, industrial production will show an expansion rate north of 50 percent year-on-year in April and north of 35 percent in May of 2021. Besides, the Colombian economy is heavily dependent on international commodity prices, as those materially affect the country’s terms of trade. With Brent prices flirting with the critical $70 mark, U.S. dollar inflows will be materially higher in 2021 as compared to 2020, and those flows will generate very positive ripple effects through the economy. Also, the fact that the vaccination process in the United States is advancing much faster than expected probably means that vaccines will flow south faster, likely allowing Colombia to have a chance to vaccinate its vulnerable population faster than initially expected by the local authorities, society and the markets in general. Construction will be a key component of the 2021 economic reactivation strategy. Despite the pandemic, 2020 was a banner year for home sales (the best year ever in terms of total units sold). Stay-at-home policies and low-interest rates likely helped to support sales. I expect 2021 to prove to be a year of inventory buildup, and the housing sector will not be impervious to such forces. In addition, the Duque administration has already made it very clear via the publication of its 2021 fiscal plan that this year will see a massive push for infrastructure investment. The reasoning is very simple: millions of jobs were lost during the pandemic, and for social cohesion to remain in place, jobs need to be created fast.
Daniel E. Velandia O., director and chief economist for research at Credicorp Capital in Bogotá: Although the Colombian economy in 2020 posted its worst recession of at least the last 120 years, activity gained nonnegligible traction during the last quarter last year amid the easing of mobility restrictions, with leading indicators such as cement deliveries and credit/debit card transactions, as well as retail, car and housing sales, showing performance that was stronger than previously expected. We expect a gradual recovery to continue ahead amid a better external backdrop, higher oil prices and the vaccine rollouts globally. All in, we expect GDP to grow 4.8 percent in 2021. The construction sector is likely to be one of the leaders of the recovery as new home sales managed to reach their highest level on record in 2020 due to households’ higher saving rates and a large public subsidy program. This has led to a significant correction of home inventories to levels not seen since 2014, and thus to an improvement in housing starts from -15 percent by mid-2020 to +5 percent in January. Likewise, the government approved in February a reactivation plan with investments for 13 percent of GDP to be executed in the next five years, which would be a joint effort with the private sector. According to the plan, 7.2 percent of the resources will be directed to housing construction. In any case, the dynamic of housing investment in the next quarters will be influenced by the discussion of the expected tax reform and the start of the presidential campaign later in the year.