ECONOMY 2011 | 12/3/2010 12:00:00 AM
More of the same
Next year’s economy will behave very much as it did in 2010. Growth forecasts are between 4 and 5 percent. Domestic demand will remain being the engine and the external front will keep being the big risk.
In the end, economy in 2010 didn’t behave as badly as the early omens, nor as well as the optimists thought it would. Growth will keep between 4 and 4.5 percent, as expected by the government.
Well, 2011 looks more like the current end-of-the-year picture than that of it’s beginning. Most projections say that the GDP will grow between 4 and 5 percent, which means that Colombians can relax in their Christmas holiday and wait for the new year with confidence. They shouldn’t claim victory, though: there are still many unresolved questions which could change the landscape, especially in the external environment.
The greatest source of optimism facing 2011 comes from the inner field. There is a clear consensus around the fact that domestic demand will push growth forward, just as it did all along 2010, in contrast with the less robust external sector.
According to Daniel Niño, manager of Economic Research at Bancolombia, if it hadn’t been for the domestic demand, we would have seen a completely different GDP behavior this year. The latter increased at a 5 percent rate, and analysts believe that in 2011 it could rise to 5.5 percent. Such a growth would be significant, given the poor prospects in exports. Even many believe that only by 2013 and 2014 a swift in the external sector could be seen, once Colombian main trade partners -United States, Europe and Venezuela- enter a better scenario.
Although employers are making an effort to find new partners and open different markets to the traditional ones, this will be a long process. And it is highly unlikely that sales to Venezuela will increase and reach the levels we saw two years ago. Although political ties have normalized and there’s an evident political will of presidents Santos and Chavez, the poor condition of the neighboring country's economy will surely involve limitations in both their ability to pay past debts as in their future purchase potential.
In other latitudes, the country will continue to benefit from the high prices of raw materials and from the commodities that Asian economies like China and India are demanding. Although it is expected that China will slow down to avoid inflation trouble, it is also assumed that prices will remain high. This will allow Colombian exports of oil, coal, nickel and gold, primarily, to continue growing in volume as well as in price.
According to the International Energy Agency (IEA), the days of cheap oil have reached an end with China’s demand. Although the growth of world’s oil consumption in 2011 will decrease compared to this year’s, the fall won’t be significant. WTI’s forecasts for Colombia are of USD $85.17 a barrel, with an 8 percent increase over 2010 price. Those are good news for Ecopetrol and for the country, which attracts more and more capital for the oil industry. Likewise, expectations around foreign direct investment (FDI) remain favorable. A 25 percent growth is expected.
The forecast that next year will be similar to 2010 extends to other areas. Inflation or interest rate overreactions aren’t expected. The Board at the Banco de la República (the Central Bank) defined a price increase goal for 2011 between 2 and 4 percent, with a 3 percent as a target figure for legal purposes. There is confidence that this goal will be achieved. And these low-level indicators are likely to help to better performance in credit and housing finance.
Analysts believe the industry will keep being affected by revaluation and by the fact that the external sector is less buoyant. This, though, could be compensated in part by domestic demand. The companies are exited about next year, according to the latest expectation survey, made in September. The amount of companies that will develop investment projects during the next year increased since a similar study of March 2010, and even more compared to what was observed a year ago.
Next year looks very similar to 2010, but there is something that can add some emotion to it: the investment grade. A large group of analysts believe that this could be next year’s big news, although it wouldn’t bring great consequences at the end: when lending, international markets are already dealing with Colombia as a country with investment grade. It would rather be a major shift towards the future, to achieve cheaper international loans.
More pessimistic ones, though, think that Colombia still has many unresolved tax issues pending before the international rating agencies grant the country with the degree of investment. Mauricio Cardenas Santamaría, of the Brookings Institute, said that "Colombia made a bet to the deficit in order to accelerate growth, as many countries did during the crisis. Results are yet to be seen”.
We have also to consider that there’s a new government in the country and that there are still many issues that the new administration has to debate. Thus, 2011 raises questions. One of them, which is crucial, is how the major reforms proposed by President Santos will evolve at Congress. The economic growth’s consolidation depend highly on them. Finance Minister Juan Carlos Echeverry is very confident, and although showing optimism is part of his job, some feel that his lack of skills in the Parliament’s complex waters is reflected in a naive attitude.
Sergio Clavijo, for example, President of Anif (the national association of financial institutions), said that even if the global crisis could be avoided successfully in 2009 and 2010, the situation remains uncertain and volatile in the U.S. and Europe. "We see an unfriendly environment towards 2011 and 2012". One of the new government’s bets that produces more doubts is employment. According to Clavijo, it seems impossible to lower this rate to 8.5 percent before 2014. "five years of growth at 5.5 percent weren’t enough. The country hasn’t been able to lower the 10 percent rate”.
If a quiet year in economic matters can be foreseen on the domestic front, the same cannot be said of the international environment. Many clouds on the global economy horizon don’t let us see clearly what will happen in coming months.
U.S. economy doesn’t consolidate its recovery. It grows at an average of 2.5 percent and the unemployment rate, 9.5 percent, doesn’t allow the confidence of Americans.
The problem is that President Barack Obama’s expansionism policy hasn’t been reflected in unemployment rates. It will surely have, though, an impact in the emerging countries’ economies, given its effect on the local currencies revaluation, which will primarily have an impact on the exports sector. Politically, moreover, the Republican opposition has criticized the spending policy, and with the new Congress, the White House won’t be able to maintain an expansion policy in spending.
Analysts believe that the Colombian peso will keep strengthening next year. Carlos Vegh, Economist at Maryland University, says that countries like Colombia and Brazil will have to adjust their fiscal policies in order to respond to their currencies’ appraisal. It is “inevitable given the sheer magnitude of capital inflows. The major emerging countries will have to accept it. "
The impact will also be felt in the trade. Although Colombian exports to the United States haven’t grown, if this powerful country’s economy doesn’t recover its strength there won’t be room for optimism.
However, Europe faces serious and deep trouble which, until recently, hadn’t been anticipated. But high debt and fiscal deficits in several countries require to switch the warnings on. Greece received this year a package of aid from the European Union and the International Monetary Fund. And Ireland accepted, reluctantly, a life jacket. In return, Europeans will have to improve their revenues, which will require to raise their taxes. The latter were, for years, their main strategy to attract foreign investment, and raising taxes in low growth times isn’t attractive for any government, given it’s potential depressing effects on the demand. Such a measure is rather an obligation which is assumed with reluctance.
After Ireland, economies of Portugal and Spain are on the 'black' list. Last week, Lisbon was paralyzed with a huge protest against the government's austerity plan, and the Eurozone crisis reverberates among analysts in Madrid. Although the Spanish insist that Spain is not Ireland, experts say that the economy remains very fragile. And before an extreme scenario, an aid package for Spain would cost a great deal of money. These aren’t, then, easy days for international economy. The world is being attacked by a financial relapse and by structural deficits in some major economies, whose consequences are still unpredictable.
It’s favorable for economies like the Colombian that Asia, especially China, will keep leading the growth. And it’s slowing down -planned but reduced- won’t have a negative impact on Latin American emerging markets. The truth is that, in 2011, the world’s eyes will aim at the great powers. The future of the world's economic stability depends on the adjustment measures that were implemented this year and that will continue in the coming months.
2011 doesn’t seem like a year for big celebrations or serious trouble. Nor will it be to sleep easy: when there is uncertainty one should keep the eyes wide open.