Colombia is on a very good trajectory, but must end the legacies of corruption and class privilege to make it a truly prosperous place.
BY WALTER T MOLANO
Colombia is a rocket ship. After suffering the ravages of a 60-year long civil war, it is a nation in afterburner. Capital is pouring in to take advantage of the treasure trove of natural resources, an enviable geographic location and 45 million hungry consumers. Like a roman candle discharging into the night, the Colombian economy is spewing out a kaleidoscope of products, from oil to minerals to manufactured goods. Wages are rising, as the bounty trickles down. Likewise, the diaspora that robbed the nation of its brightest minds and talent is reversing, bringing an influx of new ideas, techniques and capital. There is an air of self-confidence across the country which is reflected in the high level of commerce and investment. New malls are sprouting out of the ground. Sleek office towers grace the skylines of Bogota, Cali, Medellin, Bucaramanga, Cartagena and Barranquilla. A network of modern highways will soon overcome the country’s challenging terrain to improve the flow of goods and services. They will also provide better access to Colombia’s neighbors, allowing it to gain greater stability through the diversification of trade. The Santos Administration is also making great strides in strengthening the country’s institutions. The courts are finally bringing some of the so-called untouchables to justice. For example, the military perpetrators of the 1985 massacre that took place during the storming of the Supreme Court were given extremely long prison sentences. The government is also restoring property that was stolen by paramilitary groups. Acts of corruption are finally being punished. Samuel Moreno, the Mayor of Bogota, was suspended by the Attorney General for failing to take action against a series of construction-related scandals in which his brother was involved. These advances are putting Colombia upon the pantheon of the emerging markets. However, too much of a good thing can also be bad.
The heady pace of economic activity is putting pressure on consumer prices. In March 2010, consumer prices posted an annual increase of 1.84%, but they soared to 3.19% y/y a year later. The Colombian economy suffers from several critical bottlenecks that allow inflationary pressures to build rapidly, particularly in the transportation of goods due to the difficult terrain. Most of the major urban centers are far away from the coast, and Buenaventura, the major port on the Pacific, is in bad disrepair. The highway from Buenaventura is extremely poor, and the region is prone to guerrilla attacks. Moreover, Colombia still needs to improve the flexibility of its labor regime in order to allow firms to increase output. Unfortunately, a severe winter is only making matters worse. Heavy rains are producing devastating floods, destroying crops and cutting transportation lines. We believe that consumer prices could rise as much as 4.2% y/y by year end, forcing the central bank to take drastic monetary steps. The problem is that the peso (COP) is already overvalued and higher interest rates will only lead to more capital inflows. The government was forced in introduce new measures in the middle of May to increase its dollar purchases. Finance Minister Juan Carlos Echeverry announced the creation of a $1.2 billion overseas fund that would relieve some of the pressure on the currency. However, the real solution to the appreciation of the currency is a massive reduction in government expenditures. At the end of last year, the consolidated shortfall soared to $17.7 trillion pesos or 3.2% of GDP. The large fiscal gap is partially explained by structural problems, such as automatic transfers to municipalities and generous public sector pension programs. The fairways of the country clubs of Bogota, Medellin and Cali are chocked with retired generals and colonels enjoying a well-lubricated lifestyle. This is in contrast to their North American brethren who can barely make ends meet on their military pensions. However, the fiscal shortfall is also due to the heavy spending that is still dedicated to security, despite the advances that were made against the guerrilla and narco-trafficking groups. Last of all, a prodigious public works program is putting a strain on the government purse. Unfortunately, it was exacerbated by the high degree of mismanagement that sent as much as 25% of the outlays into politicians’ pockets.
In sum, Colombia is on a very good trajectory. It is harnessing its natural endowments and bringing them to market. The government is also taking a more independent approach to dealing with its neighbors and the global community, demonstrating greater degree of self-confidence. Yet, it still needs to break completely with the past in order to embrace the future. The legacies of corruption and class privilege must end in order to make this country of 45 million a truly prosperous place.
Walter Molano is head of research at BCP Securities.