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Retail sales such as here during the value added tax free days have helped spur Colombia's economic recovery. (Photo: Government of Ibague)
Wednesday, December 8, 2021
Perspectives

Colombia: Strong Growth, But Risks Persist


Despite an economic improvement, fiscal position and social unrest pose risks.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

Colombia’s GDP grew 5.7 percent in the third quarter as compared to the previous quarter, and the country’s output grew 13.2 percent from the same period in 2020, which was higher than expected. The retail and manufacturing sectors led the growth, and the country’s GDP has surpassed pre-pandemic levels. How is the Colombian government prioritizing different economic sectors in its recovery efforts? What are the year-end and 2022 projections for Colombia’s economic recovery? Which sectors are expected to do best in the coming year, and which will continue to struggle? What might this faster-than-expected recovery mean for next year’s presidential and congressional elections in Colombia?

Karla Schiaffino, Americas senior analyst of risk insight at Verisk Maplecroft: In 2021, the Colombian economy began recovering from the Covid-19 shock. After restrictions to curb a third wave resulted in a contraction during the second quarter and protracted unrest subsided, the recovery accelerated in this year’s third quarter. An increase in consumption as Covid-19 restrictions eased greatly supported the expansion of the service and retail industries, driving the recovery. A normalization of production and the recovery of oil prices also pushed up revenue from the extractives industry, further aiding economic improvement. It is likely these sectors will continue to support consumption and growth into 2022. The positive results of the third quarter prompted an increase in the government’s growth forecast from 6 percent to 8.5 percent. Notably, despite expectations, Colombia’s fiscal position remains weak after a year of expanded social spending. Furthermore, over the coming months higher inflation will depress consumption, dampening the government’s optimistic estimates. President Duque is also betting on extractives to support the way out of the crisis. Beyond August 2022, the next government will have to balance the need to support investment in the sector with social and international pressure to comply with the country’s international commitments on environmental protection. In our view, Colombia’s strong economic performance in the third quarter will not significantly improve the chances of Duque’s Centro Democrático (CD) party to win the election. Since 2019, the public appeal of the CD has decreased, opening the door for a left-wing government to clinch victory. The question is whether such a government would manage to maintain support for key sectors while achieving fiscal consolidation and resolving social demands to address income inequality and ensure environmental protection.

Sergio Guzmán, director of Colombia Risk Analysis: The DANE’s quarterly GDP report suggests that economic recovery is on the right track, despite the strikes and protests that happened in the second quarter of 2021. Colombia’s rapid economic recovery is due, in large part, to the government’s fiscal stimulus program, advances in the national vaccination plan and improved aggregate demand. It is likely that as Colombia’s economy reopens, these effects will be compounded and improve the business environment. It should be noted that GDP increments occur in the context of ongoing economic recovery and even though there are reasons to celebrate, unemployment and inequality are not improving at the same rate. The pace of job creation was sustained in the first half of the year but has recently slowed, despite the extension of subsidy programs and the rebound in the economy. It will therefore be difficult to sustain employment growth, especially considering the pressure to increase the minimum wage to above-inflation levels, which is likely to be counterproductive to the creation of new jobs. In the short term, not addressing the problem of the impoverishment of the population could generate two serious long-term effects. One is a greater concentration of economic power in a small group of large companies. The other is an increase in the concentration of wealth, deepening social unrest. Improved economic recovery is likely to help the government’s chances of enticing the public to vote for a pro-incumbent candidate; however, considering low approval rates and lagging employment numbers, the chances for that to happen in the next four months are slim.

Sergio Olarte, principal economist at Scotiabank Colpatria: The decision of the national government to fully reopen the economy in June 2021 caused economic activity to recover significantly, showing that the business structure is resilient. In the third quarter, Colombia reached pre-Covid levels and recovered what it lost in the second quarter due to the national strike. The recovery was led by the labor-intensive manufacturing and commerce sectors, generating a boost in job creation with a rate of 12.1 percent, just 300,000 jobs below pre-Covid levels in September. Colombia is pointing to a growth close to 10 percent this year due to higher employment, leading to a growth projection of 4.5 percent for 2022. The restoration of mobility has led to substantial improvements in hospitality and tourism, as well as in the entertainment and mass events sectors. However, the mining sector–especially coal–continues to lag behind, increasing production costs and causing delays in the normalization of construction. Meanwhile, the government’s countercyclical policy has been based on improving the speed of vaccination (70 percent of the population has at least one dose) and restoring mobility to almost 100 percent so that the private sector can reactivate in a sustained manner. Meanwhile, the government maintains some subsidies to strengthen the demand for work. An improvement in GDP, together with a greater response from employment, supports the preservation of the market economy status quo, ahead of elections next year. However, there are risks in the face of the expected recovery: new variants of Covid-19 may restrict mobility in Colombia, and foreign direct investment may slow as well. However, the region’s geopolitical environment may also cause foreign investors to avoid the region during the first half of 2022, making the external imbalance more difficult to finance and delaying the recovery of key investment projects such as infrastructure plans.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

 

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