Colombia’s rocky road ahead

As things now stand, the goal of maintaining the same speed of growth from the last five years has vanished. The car that was traveling at 80 kilometers per hour on an excellent highway now plugs along at 40 kilometers on a curvy and rocky road. Although everyone knew that the Colombian economy could not continue down that road at that speed without danger of overheating or crashing, nobody expected that the slam on the brakes would be so sudden.

Poor growth figures for the first semester announced last week by the DANE (national statistics agency) at 4.1 percent forced the government to lower its 2008 growth goal. The new official projection is four percent, one point less than last year’s forecast, when all the signs seemed so favorable.

Although for some analysts, to grow at this rate is not such a bad result if you take into consideration the global economic situation, the truth of the matter is that at this rhythm the country’s development is being delayed more and more. Over the last 20 years, the average growth rate of the Colombian economy was three percent. Now with the new goal it means that it will barely increase by one point from that period. That is not very encouraging for a country that has so many problems to resolve.

Everyone now knows what has happened this year. Consumer spending, which was the great invigorator of the economy in 2006 and 2007, has sunk. Household spending decreased 3.1 percent in the first semester, when during the same period last year it expanded by six percent. If you take into consideration that consumption accounts for 62% of the GDP, you understand the impact of its decline on the overall economy.

Many believe that it was the Banco de la República (the central bank) that rained on the parade by raising interest rates in order to control inflation. That forced households to pay for debt they accumulated during the boom times. This is not bad because it would be worse for them to continue to increase their debt at the same rate. The problem is that the available income of families also began to diminish because of the effect of the increase of food costs. That’s what killed spending.

And when it rains it pours. In addition, this year public investment collapsed. Between January and June it fell 15 percent, when in 2007 it was a factor that boosted the economy, growing at more than 20 percent. If public works had maintained that dynamic, it would have added 0.7 % to the GDP.

The slow down in key sectors such as industry and commerce has also become evident this year. Though mining, transportation , and agriculture were the bright spots.
To this very complex internal backdrop you have to add the uncertainty of the international financial market, especially in the United States.

Can the course be changed? Considering how discredited economic projections are across the world, no one dares to place bets.

The dean of Economics at the Universidad de los Andes, Alejandro Gaviria, says that maybe it is time to revise the emphasis that the government has placed on the current economic model. The focus has been on investment and, according to Gaviria, changes have to be made in order to make growth sustainable.

The Finance Minister, Óscar Iván Zuluaga, whose job description requires him to be optimistic, thinks that there is light at the end of the tunnel. For example, he says large public works will begin soon.

Juan Martín Caicedo, president of the Colombian Chamber of Construction, agrees with that forecast. That sector was paralyzed by a normal cycle of activity related to the beginning of new city and regional government administrations, and at the same time, the change in the contracting law made new civil works contracts quite torturous. Six road projects are in the works, Invias -the roads institute- awarded another 19 corridors for 2.5 trillion COP. And, at the end of the year, the Ruta del Sol project, the road between Bogotá and the Caribbean coast, will be awarded and regional leaders will resume other works, such as the new lines of TransMilenio in Bogotá.

The government hopes that foreign investment will continue unabated, but there is a lot of uncertainty about this point. The financial markets crisis has limited liquidity and capital will not arrive to these Latin American markets, like they did until just recently.
Investment in the oil sector, nevertheless, looks promising. More than 80 exploration wells should be drilled in the next year and interest in Colombia continues to grow.

Some believe that it is time for the Banco de la República to lower its interest rates to spur business investment and household consumption. According to the latest survey by Fedesarrollo, an economic thinktank, consumer confidence in the economy has continued to fall. A small push by the Banco de la República would not be a bad thing. But, as the former finance minister Juan Camilo Restrepo says, if inflation continues to rise, not even if lightning would strike, would the Bank lower its rates.

At about this same time a year ago, the most prestigious analysts said that the country was going through one of those rare situations in the economy in which all goes well. It was if all the stars were aligned for Colombia. Sadly, it now seems that Colombia has lost that privileged astronomical position.