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Economists’ Forecast for Colombia

September 16, 2009

Pro-business government policies account for the fact that Colombia avoided a recession during the global economic crisis, according to three economists who addressed today in New York the Andean Economic & Financial Outlook 2010.  They say the same factors account for sustained high levels of foreign direct investment and an outlook for prolonged economic and political stability. Some caution however that events with Venezuela, and the national elections in the spring of 2009, will interject some volatility.

The event was presented by the Colombian American Association, in conjunction with the Ecuadorean American Association, the North American-Chilean Chamber of Commerce, the Peruvian American Association, and the Venezuelan American Association of the US.

The three economists were: Luis Oganes, Head of J.P. Morgan Latin America Research; Alberto Bernal, Head of Research at Bulltick Capital Markets, and Gabriel Torres, Senior Credit Analyst, Moody’s Investors Service.

Pro-Investment Policies In Colombia

All agreed that progressive pro-market policies in Colombia have attracted very high levels of foreign direct investment – on the order of 4% of GDP, just below the world’s high-water mark, which is China, at 5%.   The three also concurred that the fundamentals are in place for Colombia to continue to attract a high level of foreign direct investment.  They noted that FDI in Colombia is coming in economy-building sectors such as infrastructure, manufacturing, and petroleum exports. 

In infrastructure, “the money is there,” said Bernal, but government agencies are actually having difficulty getting the money to work.  As for petroleum, Colombia, Bernal pointed out, has reached the point of producing 650,000 BPD and, by the end of 2009, is expected to reach 700,000 BPD, representing massive growth in the last several years.  The growth in Colombian oil production is a significant source of economic strength and stability for the government, which owns 90% of Ecopetrol, but also for private investors (who own the balance) and, because of governmental transparency, the economy overall.

Both Oganes and Bernal pointed to a higher than predicted or predictable level of confidence underpinning the Colombian economy.  On macroeconomic terms, Bernal considered it “unpredictable” that the Bank of the Republic (Banco de la Republica) would cut interest rates to historically low levels despite concerns the peso would depreciate significantly.  It did not.  And, while Oganes points out that the Banco de la Republica Board is divided on maintaining low rates, the most recent decision held the rates.  Thus, confidence has been earned in the stewardship of the economy in Colombia.

Business-friendly policies in Colombia (and Peru) distinguish them from Ecuador and Venezuela.  Bernal emphasized Colombia’s soaring in the World Bank’s “Doing Business” index – it is now considered better than even Chile on that measure. Venezuela is sixth from last place in the entire 183-country world surveyed.  Bernal also pointed out significant bond issues in Colombia have been over-subscribed. Ecopetrol’s, for example, was over-subscribed ten times.  This came only days after the usually very accurate World Bank published a prediction that there would be little or no interest in Colombian corporate bond issues. (Oops.)  It is not the only Colombian corporate bond issue over-subscribed. 

Dodging the Global Economic Crisis Bullet

Colombia escaped having a recession — three negative quarters of GDP growth — during the recent global economic crisis.  Indeed, it did not have even two consecutive quarters of negative GDP growth, according to Oganes.  His data (a request for permission to share or link to his data is pending — check back later) showed Colombia having negative economic growth (quarter on quarter, annualized) for the first time in 4Q08 of -5.9%, mildly positive growth in 1Q09 of 0.9% (he cautioned, however, that this data point may be revised downward), and turned downward again in 2Q09 -2.0%, and he forecasts positive growth of 1.9% and 3.2% in 3Q09 and 4Q09, respectively, for a 2009 level that is 0.5% below 2008.  For 2010 he forecasts GDP growth of 3.0%, compared to an accepted figure of “potential” GDP growth of 5.0%. 

Bulltick’s Bernal generally agreed with JPMorgan’s GDP growth predictions, but was somewhat more bullish on overall 2009 and 2010 GDP growth by 1.0-1.5%.

Oganes expressed cautious optimism that industrial production and retail sales had begun recoveries in Colombia in early 2009, but concern about central government fiscal deficits of 3.7-4.0% of GDP in 2009 (the June and September revised figures published officially) and 4.3% in 2010. On the other hand, his data showed “inflation surprised on the downside,” due largely to food price deflation. Excluding food, the “non-tradables” inflation remained “extremely stable,” he said.

Political Risks Are Overplayed

Oganes downplayed the “arm-wrestling” beteween Venezuela’s President Chavez and Colombia, stating flatly that “the risk of actual military conflict is exceedingly low.” Moreover, despite Venezuelan threats, economists have concluded it is almost impossible for Venezuela to find alternative sources of the record $6 billion in imports annually from Colombia.  Bernal and Torres agreed.  Bernal has prepared a report dated July 30 entitled “Despite Everything, Trade With Venezuela Will Not Fall.” (At link, select “Colombia Macro” and select the July 30 report.)

Bernal differed with Oganes on the meaning of an Uribe re-election, which both men assume will happen based upon presently available information. Oganes stated that markets may greet an Uribe re-election as “neutral to negative,” out of concerns for “institutional deterioration [as a result of permitting Uribe’s re-election].” But he also stated that such concerns “have been balanced by Uribe’s proven track record, and the likelihood that – even if Uribe can’t ultimately run – any likely successor would not deviate from pro-market policies.  Bernal – who is Colombian – has concluded from dozens of interviews closely following the situation believes that if he wants to be, Uribe will be re-elected, because high popular demand will trump procedural problems with the referndum on re-election.  Bernal believes that while re-election would be viewed positively overall as a matter of stability without the usual drawbacks in separation of powers.  Indeed, he said, any sell-off associated with developments in the Uribe re-election process could pronmpt a buyer’s rally among those who have confidence in stability and the country’s pro-market policies.  Thus, while Oganes saw the possibility that uncertainty “may begin to weigh on sentiment,” Bernal pointed out that markets may be reassured that Uribe is not a lame-duck.  Moody’s Gabriel Torres commented that ratings are best when politics “is boring,” citing the possibility of a change of power in Chile.  He did not see significant change in economic and industrial policies on the horizon in Colombia if Uribe were not elected, meaning, there would be no crisis and, from the economy’s point of view, it would be a “boring” election.

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