STAYING ON THE RIGHT TRACK

Colombia 2020 | FINANCE | FOCUS

On the back of strong regulatory reform, huge upticks in FDI, and the steady migration of skilled Venezuelan labor, Colombia has solid growth potential.

In 2019, Colombia saw its largest increase of FDI in years, which helped its economy grow by 3.4%. Though this was a slight dip on 2018's rate of 2.6%, it still outpaced the Latin American and Caribbean average of 0.8%. Caused in part by more funds being allocated to large infrastructural projects, better financing mechanisms, more attractive investment laws, and increased remittances, the World Bank predicted Colombia's economy would grow by 3.6% in 2020 and an even more impressive 3.9% in 2021­—although COVID-19 mitigation measures will likely force a drastic downward revision to those estimates.

Garnering USD7.27 billion in FDI in 2019, an increase of nearly 25% on 2018, Colombia saw huge foreign investments across its chief sectors. Of this, 40.3% went to petroleum and mining, 17.1% to financial and related services, 14.1% to manufacturing, 7.9% to commerce and hospitality, and the remaining 20.6% to transport, utilities, communications, and others, the World Bank reported. The country's petroleum sector saw an 18.8% increase in FDI to some USD1.58 billion in 2019, closely followed by the mining industry, which grew by more than 30% to USD1.33 billion, and financial and related services, which saw an additional USD1.25 billion invested, a more modest increase of 5.4%.
To be sure, a sizable percentage of the country's overall bump in GDP and FDI has a lot to do with the fact that hundreds of thousands of able-bodied Venezuelans are still streaming over the border to escape economic catastrophe. With 900,000 Venezuelans entering Colombia in 2018 and 400,000 in 2019, the country now shelters 1.6 million Venezuelans that intend to remain in Colombia—a number that could easily grow to 2.4 million by the end of 2020, or further, in light of COVID-19, predicts the OECD.
While establishing their legality is a thorny problem—President Duque did call for the nationalization of 24,000 children born in Colombia to Venezuelan parents in 2019—incorporating them into the workforce has proven less difficult.
Not only does the OECD reckon that Venezuelans accounted for 750,000 workers within Colombia's workforce in 2018, 1 million in 2019, and 1.25 million at the beginning of 2020, but since the fleeing Venezuelans are on average better educated than Colombians, the skills, contacts, capital, and wherewithal they bring may have also boosted Colombia's GDP by as much as 0.5% per year, analysts from the World Bank believe. On average five years younger than Colombians, in addition to healthily boosting domestic consumption, they also help mitigate the effects of aging on Colombian growth prospects.
The Colombian government realizes this, which is why it is taking stringent and responsible measures to legally integrate the country's Venezuelans. Though economic and political migrants receive health and education benefits upon arrival, it is paramount to get them integrated within the formal economy and paying taxes as soon as possible. Despite the fact that remittances grew by 10.4% in 2019 to USD3.23 billion, chiefly from the US and Spain, the country's fiscal deficit continued to grow.
Equally vulnerable to currency shocks, for every percentage point the peso declines against the dollar, say analysts from Corficolombiana, the debt-to-GDP ratio increases by 0.17%. At 50.6% in 2019, there are fears the country's overall debt burden will increase to 53% by the end of 2020, or further, depending on the impact COVID-19 has on the public purse. What's more, exports of carbon, ferronickel, industrial products, and coffee were down in 2019, a decline that was almost but not entirely counteracted by upticks in petroleum, gold, and bananas.
Though the legal, demographic, and political fundamentals of the economy remain strong, hitting the World Bank's prediction of 3.6% growth in 2020 will pose a healthy challenge. Now, with COVID-19, the threat of trade war, US-Iranian enmity in the Middle East, structural problems in the Chinese economy, and persistent social challenges, there is much that could tame growth in the region. Overcoming them is Colombia's challenge.