“Two cups for a man who doesn’t want gravy” is the proverb. As the end of a weak 2023 approaches in terms of growth and business climate, the same expression may well be applied to the Colombian economy.
The reason is that next year will be more like this according to the predictions of experts. Beyond the expected changes in one or the other indicator, the production engine moves slowly due to international and domestic crosswinds.
(Read more: Between Lights and Shadows / Ricardo Avila Analysis)
In particular, GDP expansion will once again approach one percent annually, well below the Latin American average. If it becomes the most developed country within the region in the months it reopens after beginning to contain the epidemic, Colombia will again fall behind its neighbors.
The above does not mean that everything will be as it is now. Although the speed of the water appears to be constant, below the surface there are currents of varying strength and various eddies.
Risks must always be taken into account in a world full of uncertainties. As recent events prove, many dangers lurk, and every now and then one becomes a reality.
What’s going on outside?
Undoubtedly, the most recent source of this statement is the complicated situation in the Gaza Strip, which has resulted in the entry of Israeli security forces into Palestinian territory, determined to eliminate Hamas at any cost. In addition to deaths and injuries on both sides, or the destruction of thousands of buildings and the forced displacement of large portions of the area’s population, the probability of a major eruption increases.
For this reason, some markets initially reacted unexpectedly in mid-October. In particular, oil again exceeded $ 90 per barrel, while an ounce of gold approached $ 2,000.
After that initial wave, things calm down a bit. To date, the US has deployed a pair of aircraft carriers, among other ships, to act as a deterrent to Iran and its allies. Likewise, while the Arab leadership criticizes the civilian casualties, those with diplomatic ties to Tel Aviv defend them.
The end of the current chapter is still days away, but hopes that there will be no more war fronts are now palpable. In that case, both the hydrocarbon supply and the trade flow through the Suez Canal would remain unchanged.
Under that assumption, the global economy will continue its journey toward the soft landing that experts expect. It has a very moderate growth rate, with inflation falling back within its historical parameters. Eventually, in 2025, interest rates could be cut, paving the way for a more prosperous cycle.
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However, there are those who say that this view is tantamount to wishful thinking, as traumas never go away. Even as Joe Biden and Xi Jinping shake hands and pose for photographers in San Francisco next Wednesday, we must not forget that the war in Ukraine continues its course and that the differences between Washington and Beijing remain.
And let’s not forget the upcoming election season in the US. Donald Trump is leading in the polls despite his many legal troubles and could easily win within 12 months. Given his past conflicts with Europe, his attitude toward Vladimir Putin, and his vision for Latin America, the geopolitical panorama will no doubt be even more complex if the president returns to the White House.
Speaking of the region, not only will we have to digest what’s happening in Argentina after next Sunday’s election, but it will also prepare those in Mexico. The pending issue is Venezuela, where Nicolás Maduro and his bishops are seeking to impose their own rules of the game while also trying to lift sanctions on their dubious practices.
Experts insist that more attention should now be paid to political and global tensions, aside from geography. While rivalries or change of direction between powers in a large nation have always affected the economy, this effect is now greater and felt at all latitudes.
Key issues affecting Colombia’s exchange rate or borrowing costs include the price of its primary exports, global demand for food or investors’ appetite for emerging markets. There are more ships of communication than ever, so we have to pay attention to what is happening on five continents.
Apart from this, there are other phenomena like El Nino climate phenomenon. The evidence gathered so far suggests a significant impact, which will bring many natural disasters and cause severe problems here and there.
Doubt everywhere
It is one of many unknowns across the country. Although a severe drought is expected to start in a few weeks and last till May, it remains to be seen if the precautionary measures taken will be enough to minimize the damage.
Two areas in particular: agricultural production and hydropower generation are of particular concern. First, because it corresponds to the supply and price of food; The second is directly related to energy supply, since the thermal park, even if it is fully operational, can only supply half of the demand.
In the forecasts made by different organizations and institutions, no extreme scenario, much less catastrophic, was contemplated. However, the perspective appears to be challenging for most activities.
According to PanColumbia Group’s Directorate of Economic Research, sectors such as trade and industry will show a modest evolution as a result of weak domestic consumption. Transport, accommodation and restaurants will also face setbacks for the same reason.
Construction may see some progress, especially in the civil works sector. Progress on the Bogotá Metro – the largest infrastructure project in history – and what has been achieved on tertiary roads will help partially reverse this year’s worst decline.
From the point of view of aggregate demand, the behavior of public expenditure can be very dynamic. Suffice it to remember that the 2024 national budget will exceed 500 billion pesos and that categories such as land purchases or cash transfers will increase for different groups of the population.
However, the official checkbook may not be enough to inject significant energy into the Colombian economy. One of the most attention-grabbing warning lights is the performance of manufacturing investment, which is falling and highlights the cautious attitude of businessmen due to uncertainty about the future.
The bigger fear is that the dark clouds on the horizon will affect the already well-performing employment. The most recent data show that increases in the working population are increasingly small, reflecting the reality of a slow-moving economy.
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On the other hand, the challenge represented by inflation is still above 10 percent annually. The correction is much slower than in Peru, Chile or Brazil, without ignoring that the decrease in the pace of the deficit compared to March is almost three percentage points.
This means that even if the Republic Bank starts reducing its interest rates, they will remain at a relatively high point and affect the cost of loans. If there are no unpleasant surprises due to El Nino or an increase in the disparity in the minimum wage in December, the possible reductions will start gradually and consolidate only in the second half of 2024.
To conclude, state accounts are less clear cut than they appear. A major part of next year’s spending plan is based on one-time revenues that have experts questioning the feasibility.
In addition to the above, a slightly growing economy affects the behavior of reaching the treasury. A few days ago, Dion announced that tax collections are growing at a rate of 27 percent so far in 2023, thanks to tax reform approved by Congress. Although substantial, this jump is two percentage points short of the established target.
As if that were not enough, the ruling of the Constitutional Court regarding the taxation of royalties paid to municipalities and regions by companies dedicated to mining and hydrocarbon extraction is still unknown. If the high court decides to accept the argument that these transfers can be deducted from income tax, next year there will be a shortfall of several billion pesos in government revenue.
Even if that doesn’t happen, the finance ministry is likely to pull the trigger or face the dilemma of allowing a bigger-than-planned deficit. Going to the first option would go badly with Casa de Nariño if some official plans had to be somewhat sacrificed. Going for the latter is tantamount to playing with fire, as it will lead to a higher perception of risk on the part of investors, which will be reflected in the exchange rate and government bond yields.
Here again the relationship between politics and economics appears. In other situations and faced with a low growth rate, the logical thing is to aim to improve the expectations of traders and consumers through reassuring signals or perhaps some shock programme.
But it does not seem to be the case with Gustavo Pedro to push through fundamental reforms and to make no concessions in his aim to wrest space from the private sector. The president’s explanation for the regional election results shows that he has no intention of changing direction.
This is why there is more to come. The difference is that the second cup of this broth will be served in a much more challenging environment, as the room for maneuver is narrow both economically and politically, not to mention the social situation or security.
If no major mistakes are made, the outlook for 2025 will be very positive as inflation will decline further and the international environment will improve. But first, we must complete the journey next year, which will take place in a dry and difficult terrain that will require a lot of expertise from those responsible for economic policy.
Ricardo Avila Pinto
SPECIAL FOR EL TIEMPO
On X: @ravilapinto
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