Colombia and The Global Recession

In recent postings, I have commented on the difference between the growth prospects of developed and emerging market economies. I have also noted the remarkable recovery in Latin American stock markets relative to the rest of the world. Over the next few weeks, I will be publishing a series of articles written by my students at the Business School at the University of Palermo in Buenos Aires. The articles assess the impact of the global recession on these countries and their future growth prospects.

As an introduction to these papers, it is interesting to look at the Latin American numbers along with numbers for China and the US. China, with exports projected to fall 33% in 2009 loses a little steam. But with a stimulus package equal to 13% of GDP, it loses only a little steam. The US with a 5.5% of GDP stimulus package is still losing jobs. Only one of the Latin American countries we are studying, Venezuela, is expected see GDP fall in 2009 and 2010.

World Bank GDP Growth Projections (in percent)

Region, Country	2007	2008	2009	2010	2009-2010 ave.
World	3,80	1,90	-2,90	2,00	-0,45
China	13,00	9,00	6,50	7,50	7,00
Peru	9,00	9,80	3,00	4,30	3,65
Chile	4,70	3,20	-0,40	2,70	1,15
Brazil	5,70	5,10	-1,10	2,50	0,70
Colombia	7,50	2,50	-0,70	1,80	0,55
Argentina	8,70	6,80	-1,50	1,90	0,20
United States	2,00	1,10	-3,00	1,80	-0,60
Venezuela	8,40	4,80	-2,20	-1,40	-1,80
Mexico	3,30	1,40	-5,80	1,70	-2,0

The methodology we used to analyze the effects of the credit freeze and global recession was to as follows:

1. Global Credit Freeze Led to Stock Market and Real Estate Losses of $51 Trillion.
2. What Effect in Our Countries? Large Losses and/or Panic Resulting in Reduced Expenditures?
3. Impact from Rest of World – A Reduction in Country Exports?
4. Other Domestic Impact?
5. Government Policies?
6. Prospects for Recovery?

We turn now to our first country study on Colombia.

COLOMBIA: Effects of Global Recession and Future Prospects

by Maria Victoria Vasquez, Carlos Uribe, and Elliott Morss

EXECUTIVE SUMMARY

The 2008 credit freeze caused major asset losses around the world, both in equity and real estate. The resulting “wealth effect” caused consumption and investment expenditures to fall, triggering a global recession. Consumption, investment, and employment fell in most regions of the world.

However, the credit freeze and its resulting wealth effect had little long run impact in Colombia, and the country weathered the resulting recession better than any other large economy in Latin America. But recovery will be modest, subject to depressed export markets.

IMPACT OF CREDIT FREEZE

The credit freeze has had a dramatic impact worldwide. As indicated in Table 1, the world lost $36 trillion in stock market losses directly following the credit freeze. Globally, markets have recovered cutting stock losses to $22 trillion. Latin American stock markets have recovered dramatically.

Table 1. – Global Stock Market Losses (in mil. US$)

					Index
Index	Index High	Index Low	Hi-Lo % Loss	Hi-Low $ Loss	Recent High	Hi-Now % Loss	Hi-Now $ Loss
DJ Eurstoxx 50	4.543	1.810	60,20%	7.210.000	2.763	39,20%	4.700.000
Nikkei 225 (Japan)	18.239	7.569	58,50%	2.590.000	9.844	46,00%	2.040.000
S&P 500 (US)	1.558	683	56,20%	10.350.000	1.059	32,00%	5.900.000
S&P Asia 200	6.749	3.145	53,40%	6.850.000	4.540	32,70%	4.200.000
TSX (Canada)	14.984	7.591	49,30%	810.000	11.173	25,40%	420.000
Argentina (Merval)	2.339	829	64,56%	21.985	2333	0,26%	159
Brazil (Bovespar)	73.516	29435	59,96%	641.844	67413	8,30%	133.079
Chile (IPSA)	3.499	2.101	39,95%	149.307	3465	0,97%	2.416
Colombia (IGBC)	11.439	6461	43,52%	61.599	11693	-2,22%	-2.422
Mexico (Mexbol)	32.721	16.869	48,45%	227.146	31017	5,21%	22.945
Peru (IGBVL)	23.790	6.054	74,55%	23.970	15733	33,87%	31.900
Venezuela (IBVC)	62.013	34172	44,90%	?	54111	12,74%	?
Total 7 LA Countries				1.125.851			188.077
Total				28.660.000			17.550.000
Total Adjusted*				36.000.000			22.050.000

Colombia is no exception. In fact, The IGBC fell 43% resulting in asset losses of US$6,5 billion. Nonetheless, losses have already been recovered with the stock market recently reaching new highs. Table 2 illustrates IGBC performance since January 2007.

Table 2. – IGBC monthly performance (high)

Month	2007	2008	2009
January	10203	8251	7456
February	9901	8813	7515
March	10052	8561	7611
April	10548	9200	8042
May	10011	9823	8468
June	10138	9158	9312
July	10609	8719	9628
August	9960	8833	10375
September	10291	9010	10279
October	10166	6461	10687
November	10638	6812	10537
December	10041	7174

Market capitalization in Colombia is roughly 49% – a very low figure when compared to other economies in the region. Therefore, the overall economy is not as vulnerable to stock market crashes.

With respect to construction, overall activity fell 11% after Q3/08, but quickly returned to all-time highs on account of increasing levels of public construction programs. Construction accounts for 5.9% of the economy. Table 3 illustrates overall construction activity (both private and public) in Colombia since Quarter 1, 2007.

Table 3. – Construction activity in millions of constant pesos (2000)

Period	2007	2008	2009
Q1	3,529,483	3,545,789	3,497,568
Q2	3,596,587	3,554,047	4,151,502
Q3	3,273,665	3,735,884
Q4	3,795,591	3,322,870

Source: DANE, Colombia

The picture is somewhat gloomier when considering Foreign Direct Investment. FDI fell almost 21% in Q1/09 with respect to the same period in 2008. However, as some confidence returned to international markets, FDI recovered in Q2/09, and was only 1% lower than in the same period in 2008. Foreign direct investment accounts for 4.4% of the Colombian economy. Table 4 illustrates quarterly FDI in Colombia since Q1/07.

Table 4. – Colombia, Foreign Direct Investment

Quarter	2007	2008	2009	08-09 % Change
1	2059	2874	2377	-17,3%
2	2226	2543	2519	-0,9%
3	2364	2603
4	2400	2580

Remittances to Colombia decreased significantly after Q4/08 as a result of worsening conditions in the US economy. Remittances account for 2.4% of GDP. In fact, most monthly data in 2009 show a substantial decrease when compared to the same period in 2008, as indicated in Table 5.

Table 5. – Remittances to Colombia (in mil. US$)

Month	2008	2009	% change
January	385.0	324.2	-18.75
February	362.0	379.5	4.59
March	393.7	389.8	-0.99
April	411.1	338.9	-21.30
May	410.6	340.7	-20.54
June	367.8	312.2	-17.81
July	469.2	313.3	-49.79
August	373.0	303.5	-22.90
September	480.0	313.2	-53.24
October	427.5
November	323.8
December	438.4

IMPACT OF DECLINING GLOBAL DEMAND

Colombian exports have been adversely hit by the global recession, especially because Colombia’s main trading partners (US and Venezuela) are among the weakest performers world-wide.

Overall exports are down 24% since reaching a high in Q2/08 on account of declining demand. However, export Activity accounts for only 17% of the Colombian economy – one of the lowest in the region. Table 6 summarizes overall export behavior:

Table 6. – Colombian exports by sector and destination

	Jan-Sept
	2008	2009	% Change
Total Exports	29273	23853	-18,5%
by sector
Oil	10178	6764	-33,5%
Coal	3854	4173	8,3%
Petrochemicals	1996	1834	-8,1%
Food/Bevs.	1852	1796	-3,0%
Coffee	1479	1168	-21,0%
by country
USA	10540	9017	-14,4%
Venezuela	4569	3514	-23,1%
Ecuador	1125	894	-20,5%
Mexico	463	379	-18,1%
Japan	279	253	-9,3%

Source: DANE, Colombia

THE DOMESTIC ECONOMY

Overall, Colombia’s downturn in 2009 was more shallow than the average for Latin America on account of a relatively closed economy (exports of goods and services accounted for 18% of GDP in 2008), aggressive monetary easing by the government, and a relatively stable banking system. However, Colombia’s recovery in 2010-11 will lag behind regional leaders such as Brazil, as a result of fiscal deterioration and an external reliance on the US and Venezuela, two of the hemisphere’s weak performers.

On the supply side, manufacturing, which contributed strongly to GDP growth in recent years but fell by 8.2% in January-July, and retail sales, which dropped by 4.7% in the period, are expected to have bottomed out in July or August but will remain relatively weak in 2010-11. Construction will continue to gain some support from accelerated execution of public infrastructure projects and expansion in productive capacity in mining and energy, but will suffer from the end of the residential boom of 2004-07 until confidence returns. (Economist Intelligence Unit). Figure 7 illustrates economic performance in 2008 and 2009.

Table 7. – Economic Performance

	2008				2009
	1 qtr.	2 qtr	3 qtr	4 qtr	1 qtr.	2 qtr
GDP	4,2%	3,9%	2,8%	-1,1%	-0,4%	-0,5%
Imports	12,8%	10,0%	7,8%	8,8%	-1,5%	-9,7%
Consumption	3,7%	2,8%	1,4%	1,2%	-0,3%	-0,3%
Private	4,3%	2,9%	1,4%	1,6%	-0,5%	-0,7%
Government	1,5%	2,5%	1,5%	-0,1%	0,3%	0,9%
Investment	8,4%	10,2%	12,8%	-0,1%	-3,7%	-7,3%
Exports	4,8%	4,6%	4,1%	0,9%	-1,1%	-2,1%
	14,1%	9,2%	2,9%	2,4%	2,0%	-5,7%
Sector
Agriculture/Fishing	4,0%	5,5%	2,1%	-0,6%	-0,8%	-1,8%
Mining	4,6%	7,9%	10,4%	6,4%	10,6%	10,2%
Manufacturing	2,1%	1,2%	-2,5%	-7,9%	-7,9%	-10,2%
Elect, Gas, Water	0,7%	1,7%	1,2%	1,0%	1,9%	0,1%
Construction	0,4%	-0,2%	21,1%	-11,3%	4,1%	16,8%
Retail, hotels, Rest.	2,2%	4,0%	1,1%	-0,6%	-2,7%	-3,9%
Transport & Communications	9,0%	4,6%	2,3%	0,4%	-2,0%	-1,2%
Financial Services	7,0%	4,9%	6,5%	3,9%	4,7%	4,3%
Social Services	3,4%	2,9%	1,7%	0,3%	-0,2%	0,5%

GOVERNMENT POLICIES:

In late 2008, the government asked private banks to “voluntarily” save 43% of current profits to maintain liquidity. As a result, by August, 2009, banks had liquidity levels of 15.1%, way above the 9% required by the Superintendencia Bancaria (Colombian bank regulatory agency).

Short-term fiscal policy has revolved around the financing of a worsening budget deficit provoked by the economic slowdown and delays in Colombia’s privatization program. Therefore, in order to finance the additional fiscal slippage (a total of Ps4.4trn), the Uribe administration plans to resort to issuing additional Titulos de Tesoreria (TES, government bonds) in the amount of Ps6trn (or US$3bn) – 2trn of which will be auctioned as pre-financing for the 2010 budget.

With respect to monetary policy, as inflation worries eased in 2009, Banco de la República (Banrepublica, the central bank) loosened monetary policy by slashing rates to 4% in order to promote the recovery of domestic demand and to alleviate currency-appreciation pressures. The bank is also actively participating in the FX market. Therefore, FX reserves continue to rise.

Nevertheless, both government and monetary authorities remain under a lot of pressure from exporters to curb the appreciation of the peso, which has nominally appreciated by 17% against the US dollar since December 2008.

LOOKING AHEAD

As previously stated, Colombia recovery will by slowed by fiscal deterioration and an external reliance on the US and Venezuela, two of the hemisphere’s weak performers. Tables 8 and 9 depict estimates for Colombia’s GDP growth.

Table 8. – World Bank Global GDP Growth Estimates

Region	2007	2008	2009	2010
World	3,8	1,9	-2,9	2,0
High Income	2,6	0,7	-4,2	1,3
Developing Countries	8,1	5,9	1,2	4,4
South Asia	8,4	6,1	4,6	7,0
India	9,0	6,1	5,1	8,0
East Asia and Pacific	11,4	8,0	5,0	6,6
China	13,0	9,0	6,5	7,5
Middle East and North Africa	5,4	6,0	3,1	3,8
Sub-Saharan Africa	6,2	4,8	1,0	3,7
Latin America and Caribbean	5,8	4,2	-2,2	2,0
Europe and Central Asia	6,9	4,0	-4,7	1,6

Table 9. – World Bank Latin American GDP Growth Estimates

Country, Region	1995-2005	2006	2007	2008	2009	2010
Latin America and Caribbean			5,8	4,2	-2,2	2,0
Brazil	2,4	3,7	5,7	5,1	-1,1	2,5
Mexico	3,6	4,8	3,3	1,4	-5,8	1,7
Argentina	2,3	8,5	8,7	6,8	-1,5	1,9
Venezuela	1,6	10,3	8,4	4,8	-2,2	-1,4
Colombia	0,7	6,8	7,5	2,5	-0,7	1,8
Chile	4,2	4,3	4,7	3,2	-0,4	2,7
Peru	3,3	7,6	9,0	9,8	3,0	4,3