CHRONICLE OF A SUCCESS FORETOLD

Colombia 2014 | ECONOMY | REVIEW: ECONOMY

Despite being in an election year, Colombia's fortunes are good, with promising gains in the peace process and sustained petroleum production paying dividends.

Since emerging as Latin America's third largest economy, Colombia's macroeconomic performance has been strong. The Santos administration's steadfast commitment to achieving peace under its tenure could have pivotal consequences, unlocking the nation's marked potential as a leading regional economy. The stable increase in the production of crude oil will continue to finance a concerted focus on the development of infrastructure and the flourishing construction sector, encouraging the influx of foreign capital and bolstering the stock exchange.

DEMOCRACY IN MOTION

In 1Q2014, Colombian politics were dominated by the impending elections of the second quarter. However, the gains made over more than a decade of rule by the Social Party of National Unity were not jeopardized by the economic uncertainty that all too often accompanies electoral processes. Calls to avoid politicizing economic issues in debates reflected a broader appreciation of the progress that had been made to date. GDP growth during 1Q2014 reached an impressive 6.4%, with the construction sector growing by 17.2%. Other areas of significant growth were services at 6.3%, agriculture at 6.1%, and mining and quarries at 5.6%. The result of the elections was a solid victory for Santos and his party's center-right policies, and the promise of continued stability.

THE RIGHT MOVES

Overall, the Colombian economy grew by 4.3% in 2013, experiencing the highest growth of 4.9% in 4Q2014, 0.8% more than 3Q2013. Inflation stood at just 1.94% in 2013, the lowest in 58 years according to the Ministry of Finance. Central Bank predictions for inflation for the years following 2014 will average at 3%, a figure that fits into the long-term strategy of the institution and the government's fiscal policy. The Ministry of Finance, placing transparency and credibility at the forefront of strategic decisions, has developed a detailed medium-term plan. The 2011 Ley de Regla Fiscal (Fiscal Regulatory Law) called for the formation of a consultative council and working groups to maintain a sufficient level of income to finance government spending and to reach the deficit levels deemed acceptable by the ministry. Taking into account the slowing of emerging economies predicted by the IMF for 2014, and the simultaneous but gradual recovery of the US and the EU, the plan aims to shift from an overall public sector deficit of 0.9% of GDP in 2013 to a surplus of 1% in 2025. According to Oanda, the Colombian peso to US dollar exchange rate averaged at Ps1,930.94/$1 over the period from July 2013 to July 2014, reaching its lowest point just before the Presidential elections in early 2014, and subsequently strengthening on the back of Santos' electoral success.

IN A BETTER MOOD

The economy received a sign of approval from Moody's in late July, with the country's sovereign rating upped one notch from Baa3 to Baa2 with a stable outlook, having steadily improved from a negative rating a decade earlier in 2003. It has received BBB (Stable) ratings from both S&P and Fitch in 2013 and 2014 respectively. The Andean nation ranked 43rd in the Doing Business 2014 classification, receiving a 70.54% score and notable mention for improved provision of electricity and the enforcement of contracts.

At the same time, the IMF made some general recommendations and indicated areas of perceived deficiencies. Though calling for structural reform to promote more inclusive growth, a reduction in informal economic activity through the reduction of non-salary labor costs, lowered spending on health, and a reform of the pension system to make it both more comprehensive and equitable, the institution also recognized the considerable progress made by the government in recent years, noting that it is now in a position to lend money to the IMF, rather than borrow from it. It hailed solid macroeconomic policies and the determined development of the free market model as reasons for the country's more comfortable situation.

INTERNATIONAL AFFAIRS

However, Colombia ended 2013 with a current account deficit of 3.4% of GDP, rising from 3.2% in 2012. The increase can be attributed to lower global prices for key export commodities such as coffee, coal, and ferronickel, making a general shift toward a diversified economy more pressing than before. External debt reached $90.58 billion in November of 2013, and 24.1% of GDP. Private external debt, both long and short term, rose to $39.35 billion, while public debt represented $51.23 billion, a growth of 13.3% on the same month of 2012. At the start of the year, the total figure was around $80.74 billion, growing by 12.19% by 4Q2013, while the balance of payments deficit stood at $12.7 billion at year-end. The country's primary trading partners have remained largely the same in recent years, and the single largest market, receiving 35.32% of total exports in 2012, was the US. Other key markets include neighboring Panama, as well as Spain, the Netherlands, and China.

FDI was a record $16.8 billion in 2013, the result of years of planning to encourage the influx of capital and to boost confidence in the country as a focus of investment. The lion's share of this figure went to the petroleum, hydrocarbons, and mining sectors. As a percentage of GDP, FDI reached 4.4% in 2013, compared to just 2.4% in 2010, the direct result of the May 2012 signing of the Colombia-US Free Trade Agreement (FTA). This eliminated duties on a range of traded commodities between the two nations, strengthened intellectual property rights in Colombia, and opened up its services sector to investment from dynamic US corporations with experience in these fields.

GREASING THE GEARS

In 2013, Colombian crude oil production reached over 1 million barrels of oil per day (bbl/d), representing a 6.6% increase over the course of the year. As a result, Ecopetrol, the national oil company, became one of the most attractive stocks traded on the exchange. Despite fluctuating global oil prices, the sector provides crucial funding for investment in public works and the broader development other sectors of the economy. Foremost among these is infrastructure and construction. As a result, efforts to develop the housing, mining, agriculture, innovation, and infrastructure segments were intensified, with the latter receiving investment of $8.2 billion over the course of the year, nearly double the figure of 2010. The construction sector expanded to an unprecedented degree as a result of government housing initiatives, with over 40,000 new homes begun in 2H2013, over half of which were designated as social housing. Another key sector that will thrive under heightened levels of security and a resolution to the conflict is tourism. Arrivals in 1Q2014 reached almost 600,000, around one-fifth of whom were cruise passengers. In addition, approximately one in five visitors hailed from the US.

SECTORAL APPROACHES

The agriculture sector, historically important for the country, registered its highest levels of growth in 23 years, with 5.2% growth over 2013. Positive climatic conditions encouraged better output, while the prospect of a peace deal could open up new land to formal cropping. The coffee sector grew dramatically by 22.3%. The mining sector, despite marginally reduced coal exports, remains buoyant and represents an area of strong potential, with the nation's prestigious position as the leading global emerald producer helping to improve the country's international image. Despite being a generally bad year for industry, owing to decreased global demand and lower prices for certain exports, the commercial sector balanced out this negative performance as confident domestic consumers with a higher purchasing power led to better sales across the board. The financial sector, which contributes almost 20% to GDP, grew by 4.6%, in parallel with the wider economy. With a potential reduction in defense expenditure as the peace process advances, funds should become available to develop a number of sectors. “Certain sectors are sure to benefit from reduced military spending," noted Paula Marcela Arias Pulgarín, Director of COLCIENCIAS, in conversation with TBY. “Science and technology firms enjoy greater opportunities, and as we achieve higher levels of security, investment in other sectors will grow," she explained.

The unemployment rate in December 2013 was at 8.4%, down from 9.2% in 2012. DANE, the national statistics agency, notes that approximately 21.58 million Colombians had a place in the labor force by the end of the year, and 2014 is expected to show the lowest figures in the country's history. The populations of the Quibdó and Armenia departments registered the highest levels of unemployment, while Bucaramanga and Bogotá had the lowest.