Finance Minister of the Year 2015: Cárdenas clinches Colombian credibility

Mauricio Cárdenas’ fiscal credibility and investment plans have bolstered the country’s defences amid the emerging market rout, while boasting the best economic growth in the region.

Mauricio Cardenas

Well-managed commodity-rich economies in high-yielding developing regions have received a tide of speculative capital post-crisis, heaping on currency appreciation pressures and savaging export competitiveness. 

But that was the easy bit. Portfolio flows to emerging markets are vanishing across the board in tandem with the commodity price correction and the prospect of a tighter US monetary policy. The good times are over. South America is now roiled by a strong negative terms-of-trade shock, with limited fiscal and monetary tools to soften the blow.

Colombia, in particular, is in the line of fire. Its stock market has collapsed over the past year, as of late-August the peso was down over 20% against the dollar year-on-year, the fiscal deficit is set to hit 3% of GDP in 2015.

Sovereign credit markets, however, are, at first blush, eerily calm. Yields on Colombian peso-denominated government securities have barely budged since 2014, in contrast to Brazil. Over the past three years, the country’s debt has outperformed the Latin American benchmark, and in March 2014, JPMorgan doubled the quantum of Colombian bonds in its sovereign indices. The relative tranquillity in the bond market is a clear statement of market confidence in the centre-right administration of President Juan Manuel Santos Calderon and his fiscal commander in-chief Mauricio Cárdenas, Euromoney Finance Minister of the Year for 2015.

Policy credibility, an under-appreciated and abstract virtue, takes years to secure and can be quickly lost. But over the years, Cárdenas has built up Colombia’s external defences, boosted the fiscal framework, and sought to diversify the economy. In office since September 2012, and promptly re-installed in Santos’ second term in 2014, Cárdenas is rightly credited for his deft stewardship of the economy, which has been the growth leader for Latin America in recent years expanding 4.9% in 2013, 4.6% in 2014, while a slower but still-decent pace of expansion is expected this year at 3.2%. 

Colombian growth has overtaken that of Peru, driven, in part, by luck given the composition of its commodity exports (oil and coal versus its neighbour’s dependence on copper and gold, where prices have fallen more precipitously), credit growth and infrastructure investment. In short, a revenue-neutral tax reform in 2013 that secured a jump in formal-sector jobs and the 2013 $2.7 billion stimulus gamble – which offered subsidies on mortgage loans for low and middle-income housing, in an effort to redress inequality – paid off.

Cárdenas, a former mining minister, has deftly navigated the commodity boom and, thus far, the bust. After all, his views championed in 2011, for example, now look remarkably prescient. In his capacity as Latin America head for the Brookings Institution, a Washington DC think-tank, he issued sharp warnings that China’s rapacious appetite for commodities might have delayed structural reform and efforts to boost savings and investments across Latin America.

True to form, the China-driven correction in commodity revenues, which typically accounts for a fifth of government revenues, has blown a hole in the trade balance across South American producers, and ignited investor fears, more generally, about the emerging market commodity-driven growth model. Colombia has not been immune.

The current account deficit is expected to hit 6% of GDP this year, half of which will need to be covered by hot money flows. While markets have taken fright over the splurge in pro-cyclical spending in recent years in the likes of Argentina and Brazil, Cárdenas, by contrast, has recited the mantra of fiscal responsibility and imposed a 2.2% structural deficit cap, though a cyclical shortfall at a higher level is permitted when the economy is running below potential, such as this year. In addition, the government is seeking to shift public spending towards sectors with higher fiscal multipliers.

Alberto Bernal, head of research at Bulltick Capital Markets in Miami, highlights market faith invested in the finance minister. "The external environment has changed drastically in the last couple of years. In my view, the continued soundbites of Minister Cárdenas on the need to comply with the fiscal rule have been positive for confidence."

In an interview with Euromoney last year, Cárdenas summed up his pro-market philosophy. "We are sticking to the fiscal rule, which we think is fundamental for our economic credibility. The framework we have has allowed Colombia to gain better access to the financial markets – we have a higher credit rating than we had four years ago and the interest we pay on our bonds is much lower so the fiscal rule is something we will defend."

He has a point. Euromoney Country Risk, which tracks the views of 400 economists around the world on a regular basis, calculates that, as of June 2015, Colombia improved its sovereign risk-ranking by seven places since December 2013 from 46 to 39. The data also note Colombia’s marked improvement in its access-to-capital score, from 4.75 in June 2013 to 7.33, as of June 2015, while the sovereign has significantly improved its relative risk-ranking over South American peers in recent years.