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Elliott Morss | February 21st, 2018

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Colombia and The Global Recession

© Elliott R. Morss, Ph.D.

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

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