Political and economic risks threaten Colombia’s recovery from pandemic

Analysts warn of tough challenges ahead for Latin America’s fourth-largest economy

Colombia has recovered impressively from a sharp downturn that fuelled violent unrest last year but Latin America's fourth-largest economy is still not robust enough to cope with tougher challenges ahead, economists have warned.

Longstanding problems in the labour markets as well as tax and pension systems have not been tackled. And with presidential elections in May, investors and analysts are worried that Colombia will follow Chile and Peru and veer sharply to the left.

The frontrunner, former guerrilla and Bogotá mayor Gustavo Petro, has pledged to introduce policies such as a ban on oil exploration.

"Polls currently show Petro as favourite to win," said Silvana Amaya, senior analyst at the Control Risks consultancy in Bogotá. If he does, it would bring "a significant shift in the country's economic policy, leading to market uncertainty".

For now, Amaya added, companies were likely to “put significant decisions on hold and wait until the politics gets sorted out before any crucial investments are made”.

Gross domestic product grew 10.6 per cent last year, a strong rebound from the contraction of 6.8 per cent in 2020 caused by the pandemic, the nation’s statistics agency reported last week. It was the highest growth rate since at least 1906, according to central bank estimates. In the fourth quarter alone, GDP expanded 4.3 per cent compared with the previous quarter.

Meanwhile, retail sales jumped 15.9 per cent in December from a year earlier while manufacturing output climbed 13.1 per cent. Both figures smashed analysts’ expectations.

Yet the winner of May’s election will face deep structural problems in taxation and pensions as well as the labour market, as outlined in a recent OECD report that highlighted inequality, stubborn levels of poverty and low social mobility.

These factors all contributed to the sometimes violent protests that engulfed Colombia last year. Bogotá’s sovereign debt rating was downgraded from investment grade after fiscal reforms were largely abandoned in response to the protests.

Moreover, with inflation rampant and imports far outstripping exports, analysts said the expansion of recent months might prove to be unsustainable. While revenue from exports was just 1.3 per cent higher at the end of 2021 than it was two years earlier, the value of imports had risen 9.5 per cent.

Trade deficit

Colombia’s trade deficit in December was the second-highest on record for the final month of the year, while annual inflation for January was almost 7 per cent, its highest level since 2016.

"The fact that both consumption and imports are way past their pre-pandemic peaks suggests that Colombia's economy, like Chile's, may be overheating and so likely to slow down sharply in 2022," said Felipe Camargo, senior economist at Oxford Economics in London.

In January the central bank responded to the inflation risk by raising its key interest rate from 3 per cent to 4 per cent. That was the biggest rate rise in 19 years and went some way to answering critics who argued the bank was slow to act late last year.

“Of all the central banks in Latin America, we think the Colombian bank has been furthest behind the curve,” BNP Paribas said in a note to clients, adding that it believed there was a “high probability” of an even bigger increase, of 1.5 percentage points, in March.

From then on, politics will take centre stage. Colombia’s presidential election is scheduled for May 29th with a second round, if needed, on June 19th.

The rightwing president Iván Duque cannot seek a consecutive term. Petro, a former leftist guerrilla who lost to Duque in 2018, leads most polls, but the true level of his support will only become apparent after legislative and primary elections to decide the candidates for the centre-right and centre-left blocs on March 13th.

Petro will also face competition from Rodolfo Hernández, a 76-year-old populist and businessman who is running independently, who placed second in recent polling of voter intentions.

Environmentalist support

Petro has pledged to wind down Colombia’s oil and coal industries by halting all exploration if he forms the next government, and said Colombia should focus on manufacturing and agriculture instead.

While his promise has won praise from environmentalists and some young voters, it would have a huge impact on the economy. Fossil fuels generate about half of export revenue, adding to official statistics.

Petro has also spooked investors by pledging to increase trade tariffs, repeal laws from two decades ago that liberalised the labour market and enact land reform.

“People are genuinely scared by what might happen because we don’t know how real his words are,” said Amaya. “He’s sent some messages that are worrisome for some sectors.”

The OECD report gave some indication of the challenges the next government will face.

While praising the country’s recovery from the pandemic, the organisation pointed out that only 5 per cent of Colombians pay income tax – lower than in any other member state – and tax revenues are worth only 20 per cent of GDP, low even by regional standards.

Intergenerational mobility is worse in Colombia than in any other member state. The OECD estimated it would take 11 generations for a Colombian to move from the poorest 10 per cent of society to a middle point. Across the OECD as a whole, it would take four generations.

“Productivity growth has been weak for two decades, including relative to regional peers,” the organisation said. Ambitious reforms to help businesses grow and become more efficient “would allow a significant leap forward for material wellbeing in Colombia”, it added. – Copyright The Financial Times Limited 2022

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