Colombia: Political complacency could cost a decade

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By:
Rob Dwyer
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Structural reforms needed to reach potential; Colombia example of growth by fiscal reform

Latin America will not fulfil its growth potential in the coming decade because of continued complacency about the need for economic reforms, according to some senior Latin American finance professionals. "A good result for Latin America is that it grows at 4% [per annum] for the next decade. And that is pretty low," says Miguel Savastano, deputy director of the western hemisphere department at the IMF. "If you think Latin America could grow at 7% a year, you are dreaming, but if you were in Asia you wouldn’t be dreaming. And why is it only 4% in Latin America? Because we have been lacking all the reforms."

Carlos Steneri, a leading figure in Uruguay’s negotiation team when the sovereign defaulted in 2002 and now a partner at the Southern Cone Investment Group, agrees that the region’s recent solid performance is allowing governments to be self-satisfied: "We have had the best economic environment for the past 50 years and yet complacency means that we are not doing the necessary structural reforms like in education and infrastructure."

Exceptional performer

Juan Carlos Echeverry, Colombia’s minister of finance and public credit
Juan Carlos Echeverry, Colombia’s minister of finance and public credit
One exception is Colombia. The sovereign has recently joined the region’s investment-grade club; it is pushing ahead with a stream of politically difficult structural reforms and is investing its current windfall from oil and coal exports in reducing the government’s fiscal burden. Juan Carlos Echeverry, Colombia’s minister of finance and public credit, says the government aims to eliminate the fiscal deficit by the end of its term in 2014. It is ahead of its own targets, following higher than expected tax receipts in 2011.

The government also reformed its regulations that govern $5 billion royalties from sales in the energy sector (oil, gas and coal), and introduced bills to reform healthcare, tax and employment law. The Colombians also became the second country in the world, after Germany, to enshrine fiscal discipline in the constitution.

Although the reforms were unpopular and difficult to get enacted, the country has been performing well. More than 2 million jobs were created in 2011, taking the total employment level to 21 million out of a total of 45 million from 15 million at the end of the 1990s. The country now has a savings rate of 36% and an investment rate of 29%. It has an ambitious $100 billion of investments in infrastructure planned for the next 10 years – 25% of which it hopes to attract from the private sector through new public-private partnership legislation.

The reforms and an emphasis on a macroeconomic approach have meant official growth stood at 5.8% in 2011, but Echeverry says he expects fourth-quarter results to be revised upwards to take it over 6% for the year. The first two months of 2012 have been good too; the country is ahead of a range of targets, most notably foreign direct investment, which is 25% higher than last year at this point. Full-year FDI in 2011 was $15 billion. The markets clearly approve: the CDS spread for Colombia is currently 115 basis points – just behind that of Japan.

While Echeverry is widely recognized as having strengthened the Colombian economy, not everyone heaps the credit all at his door. "While I respect Echeverry enormously – he’s done a fantastic job – I do keep scratching my head and wonder how much of what is going on in Colombia is down to him and how much is down to favourable global conditions," says Guillermo Mondino, head of emerging markets research at Citibank. "Colombia can not but do well in the current climate."

While that is true, Colombia is outperforming a pack of countries that shares these favourable conditions; Echeverry believes his government’s reforming zeal is responsible for the results.

The macro and the micro

"My philosophy, my mantra is macro [management] is mostly fiscal, and fiscal is mostly micro [management]," says Echeverry. "The causality is passing and passing reforms. Once you fix the micro the fiscal is fixed, and once the fiscal is fixed you basically have the macro in place because you then have more room for monetary, exchange rate and inflation policy. Micro leads to good macro."

Nor is he finished. He is introducing proposed reforms to more than 500 of the country’s 1,200 tax codes. The aim is to simplify and place some moral responsibility on the country’s growing wealthy class to pay a higher effective rate. Without reform, some warn the continent might not face a gradual slowdown in investors’ portfolio flows and FDI. The challenge, according to the IMF, is to be more ambitious or risk losing a golden opportunity to build current strength into sustainable growth.

"If we are content for 4% growth and avoiding a crisis, then we have low expectations," says Savastano. "And if now is not the time for reforms, then when?"