Colombia is set to become one of the leading emerging economies after BRIC, experts agree.
BY LATIN AMERICA ADVISOR
In a report recently released by HSBC, analysts predicted that Colombia may become one of the world's 30 largest economies by the year 2050, with only Egypt and Malaysia increasing in size at a faster rate. The Andean nation would need to maintain an average growth rate of 4 percent to match the report's predicted position of 26. Is Colombia's economy on track to become a top 30 economy by 2050? What steps would the government and private sector need to take to realize the report's forecast?
Daniel E. Velandia O., head of research at Correval in Bogotá: This is the first time in several years that a new government can focus on issues other than violence and security. Hence, thanks to the advances carried out on this front during Álvaro Uribe's administration, the current government has been able to direct all of its efforts to face other structural problems like a very high unemployment rate, a long-term fiscal deficit, inefficiencies in the healthcare sector and lack of infrastructure. Currently, local analysts and the government itself are expecting an average GDP growth rate of close to 5 percent for this decade. One of the most important assumptions on which this forecast rests is the high probability of an oil mining boom in the next eight to 10 years. While Colombia has always had a high potential for oil production, it wasn't until today that it has been possible to explore regions that were surrounded by illegal armed groups before. In turn, this sector's performance will contribute to higher royalties for the government which, if efficiently distributed, should permit the country to reach growth rates of even higher than 4 percent in the next decades. Congress is in the process of approving several structural reforms. Although solutions to issues such as a lack of infrastructure are needed as soon as possible, government policies are going the right way to permit the Colombian economy to become one of the 30 largest in the world. On the other hand, the most important step that the private sector must take to reach this goal is to solve the deep lag of productivity and competitiveness that remains in some sectors like industrial manufacturing.
Luis Oganes, managing director and head of Latin America Research at J.P. Morgan Chase & Co. in New York: Colombia's growth dynamics have improved dramatically over the past decade. Efforts from the Pastrana and Uribe administrations to advance structural reforms on pensions, taxes, territorial transfers, royalties and trade agreements-along with the marked improvement in the security situation-have done wonders to promote investment. Indeed, after having reached 25 percent of GDP in the mid-1990s, total investment collapsed to 13 percent of GDP by the end of that decade amid the first recession that Colombia had seen in five decades. Since then, investment has been recovering steadily, allowing the Colombian economy to avoid outright recession in 2008-2009. Total investment bounced back to 25 percent of GDP by the third quarter of last year, which should enable the Colombian economy to sustain a growth pace of around 4.5 percent in coming years and to eventually become one of the largest emerging market economies after the BRICs. That said, the government still must tackle several structural issues in order to boost growth prospects and further reduce the crowding out of the private sector. The main ones still lie on the fiscal front, where the central government's deficit remains stubbornly high and healthcare costs threaten to become a growing contingent liability. Fortunately, the Santos administration has made an appropriate diagnosis of the pending reform agenda and is already pushing it through the legislature. Credit rating agencies may soon reward such efforts by restoring Colombia's investment grade status, which was lost in the late-1990s. This should help Colombian companies tap credit markets at a lower cost, which would further enhance the virtuous circle of higher investment and GDP growth.
Andrés Escobar, president and partner of EConcept AEI in Bogotá: Colombia experienced an average GDP growth of 3.9 percent over the last four decades. During this period, it faced severe bottlenecks at different points in time related to violence, trade and capital flow restrictions, corruption, poor infrastructure, low coverage in education and fiscal imbalances. In short, productivity growth has been limited by a number of factors. During the last two decades, substantial reforms have been made to limit these growth inhibitors. Although many problems still plague the Colombian economy, one can safely say that the recipe for higher productivity growth is coming together at last. In order to keep momentum going during the next four decades, the government has to focus on infrastructure, (bilingual) education, fiscal sustainability and a policy mix that successfully handles the negative consequences of commodity booms. Securing property rights must also be a priority, especially in rural areas. Improvements on these fronts will facilitate taking advantage of a large domestic market and turn Colombia into an export hub. The domestic capital market has huge growth potential, as lower fiscal deficits will force private pension funds to invest in new instruments. Under these circumstances, corporations must leave behind the security-related fears of listing companies in the stock exchange. Also, research and development has to climb rapidly in the priorities of the corporate world. The private sector has to start looking at Asia as an export destination. Colombia is quite vulnerable to climate change. Both the public and the private sector must internalize the need to be environmentally friendly.
Erich Arispe, director in the sovereign group of Fitch Ratings: While the global financial crisis and breakup of trade relations with Venezuela detracted from growth in 2009 and 2010, these factors have not structurally weakened the Colombian economy. Fitch considers that Colombia's coherent macroeconomic policy framework, improved security environment, strong institutions and healthy financial system will likely allow the country to regain growth momentum in 2011 and 2012 averaging 4.5 percent. Upside risks on this growth outlook are present due to the positive developments in the commodity sector. According to official estimates, oil production could increase by 50 percent over five years from approximately 800,000 barrels per day in 2010 to 1.25 million in 2015, based on actual recoverable reserve levels. Coal production could increase from 92 million tons per year to 128 million during the same period. Aware of the increasing importance of commodities, the Santos government has put forward legislation to maintain macroeconomic stability and strengthen the country's fiscal framework. Fitch believes that establishing a clear, rules-based and transparent mechanism to save the potential commodity windfall would prevent distortionary effects on the economy, especially on the inflation and exchange rate fronts. Moreover, such a mechanism, in combination with fiscal reforms designed to provide a credible path toward fiscal consolidation, could enhance the government's capacity to implement counter-cyclical fiscal policies, thus making long-term growth performance more stable. Finally, faster and more efficient infrastructure development, increased labor market flexibility, greater diversification and institutionalization of trade links would be positive for general growth prospects and improve the non-commodity sectors' competitiveness.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.