BIG YEAR

Colombia 2015 | DIPLOMACY | YEAR IN REVIEW

Colombia is rapidly becoming ever more integrated into both regional and worldwide economic and political agreements, as 2015 already marks a key milestone in the country's economic development.

2015 is shaping up to be a definitive year in Colombian history as it defines its role in the global economic system, advances politically, and works to close the door on decades of violence and instability. At the helm, President Santos, who is now in his fifth year on the job, has prioritized closing this chapter through ongoing negotiations that have been bolstered by economic development. This strategy promotes economic integration of peripheral regions as the key to national unity.

Colombia's leadership has also changed its policies to reflect a new or better understood reality. After years of perusing a failed anti-narcotics policy perpetuated by the US's Reagan administration in the 1980s, Colombia's lawmakers are moving to address the root causes of narcotics trafficking economics. Defying the US, the Santos administration banned aerial spraying of coca crops in 2015, citing health concerns. In May 2015, Colombia's justice minister delivered a speech at the UN in favor of decriminalizing consumption, and finding alternatives to incarceration for minor drug offenses.

On the diplomatic front, the last year saw Santos and his administration working to integrate Colombia into both regional and worldwide economic and political agreements. New markets, and subsequent growth help to explain why the country bucked the regional/global economic downturn in spite of decreasing commodity prices. While the national economy slowed in general, the Pacific Alliance agreement to establish tariff-free trade with other signatory countries has provided the impotence for investment that the country needed. As Colombians integrate into the $2.2 trillion Pacific Alliance economy, they hope this trend will continue.
While Latin America has been the focus, Colombian diplomats have also travelled the globe to such destinations as the UAE, where trade agreements have been hand-shaked, and plans for new embassies discussed. Korea has emerged as another important partner, and important source of FDI, being the second-largest foreign investor. Bilateral trade increased from $730 million in 2005, to $2 billion in 2014. And last year, Minister Cecilia Alvarez-Correa signed an offset agreement with Korea's Ministry of Trade, Industry, and Energy, as well as the Korean International Cooperation Agency, and the Korea Trade-Investment Promotion Agency, to provide technical assistance to Colombia's manufacturing and energy sectors.

The national economy was another important story over the past year, as the commodity price slump hit a number of Colombia's key exports. To that end, a strong construction sector, bolstered by agriculture and hefty infrastructure development spending played a leading role. Meanwhile, the central bank held policy rates in the face of steep inflation, calming investors and generally keeping the economy humming along. This helped to boost construction, which grew at over 10% in 2014. This style of monetary management within an inflation-targeting framework has a history of containing inflation in Colombia at between 2-4% since 2009, barring devaluation and incumbent pressures.

According to Colombia's national statistics agency, the economy expanded 3.5% in 4Q2014, which while short of market expectations, still puts growth for 2014 at 4.6%. While this assessment is at the bullish end of the spectrum, it is only marginally ahead of the rest. Trading Economics, for example, estimates that the economy grew by slightly more than 3%, while the Central Bank pegged growth at 4%.

With the energy sector sputtering, other sectors of the economy were responsible for much of the growth throughout 2014, and into 2015. In 2014, the government pushed through tax increases to help close the budget gap. This, and other conducive monetary conditions, underpinned by shrewd fiscal policy kept the ship steaming ahead.

As of 2015, the energy sector is one that is in some ways ahead of global trends and in other ways lagging. In the latter case, energy companies complain of underinvestment as aging wells reach the end of their productivity cycles. However, with revenues from oil and gas underpinning government spending, less and less capital is free for reinvestment in exploration. At the same time, the operational and cost advantages of neighbors like Venezuela are making it increasingly costly to produce oil in Colombia.

Eventually, fossil fuels will lose their prominence in the global economy; a development that an increasing number of policymakers and environmentalists are working towards, and in this regard, Colombia is ahead of the curve. Like many countries in South and Central America, Colombia is blessed with many rivers that are ideal for electricity generation. According to the World Bank, more than 70% of the country's electricity came from hydropower, while 26% came from natural gas, 3% from coal, and 1% from wind and other sources. That said, Colombia's hydropower potential is largely untapped, even though it generates the bulk of its electricity, at 9GW, which is less than 10% of the country's total potential of 93GW.

On another front, cement production is strong, mortgage rates are low, and the right fundamentals are in place— between 2014 and 2018, the construction sector is expected to post a CAGR of 10.96% according to industry estimates. In addition, the government is facilitating growth by pushing through reforms that encourage private investment in infrastructure. The state has also committed billions to advancing these goals. However, economic uncertainty might impinge on consumer willingness to invest in housing, as declines in the peso drive up the cost of importing building materials and dollar-backed loans. Ultimately, the most successful strategies will capitalize on the aforementioned opportunities in the market, while exhibiting pragmatism with regards to future uncertainty.