The Colombian economy in 2009… uh, oh…

The world’s economic outlook is uncertain. Bankruptcy and massive layoffs take place daily in the United States and Europe. The International Monetary Fund (IMF) just came out with its forecast. Less than 3 percent growth signals a global recession. World growth will be at 2.2 percent in 2009.

How will Colombia fare in such a gloomy world scenario? The answer depends on the dose of pessimism made by the forecaster. There are some who believe that the best Colombians can do at the end of this year is try to have a good time, because 2009 will be so complicated that perhaps there won’t be an opportunity to celebrate again anytime soon.

It’s difficult to be an optimist at this point. Mauricio Cárdenas, director of the Latin America Initiative of the Brookings Institution, says that external realities look much more difficult than what people think. “Almost all of the external variables are lined up against Colombia. So while before the winds were in our favor, today everything is very negative.”

Nobody believes that in 2009 the Colombian economy will slide into a recession; but the economic decline will be deeper than it was believed to be a few months ago. The most pessimistic forecasts signal that, at best, next year the economy will grow at 2 percent. The most optimistic, including the government, believe that figure could be between 3 and 4 percent. In any case, going back to 3 percent is bad news in terms of employment and opportunities to address the country’s poverty.

In a global recession, where will the greatest danger for Colombia come from? From several sources. The first impact will be felt in foreign trade. The United States is Colombia’s leading trade partner and receives 41 percent of all Colombian exports. If the US curbs its demand for goods because of recession, exports from Colombia will inevitably drop. In addition, if the rest of developed countries cut their imports of raw materials, the prices of many commodities will drop, and this will affect traditional Colombian exports that had been on the rise. Oil prices are already below $50 USD a barrel, when at midyear they had reached $140 USD. But prices of nickel, gold and coffee have also declined.

But what happens in Venezuela, Colombia’s second largest trade partner, a country which takes in 14 percent of all Colombian exports, will be the most critical issue for Colombia next year. A fall in oil prices will sharply affect its economy- one that according to the IMF, will only grow 2 percent next year. If Venezuela buys fewer products, many job-creating Colombian businesses will face serious problems.


It is estimated that a fall in external demand, mainly from the United States and Venezuela, together with lower commodity prices could decrease next year’s growth rate to 1.1 percent.

The other dangerous front for the Colombian economy will be foreign direct investment, which has grown sharply during the last four years. Former Finance Minister Juan Camilo Restrepo maintains that international finance will be affected, and many multinationals will rethink their investment plans throughout the world, including Colombia. Big projects are supported by foreign credit. That credit, as is widely known, is becoming ever scarcer.

Neither can a credit crunch be discarded for 2009. Today the banking system and the real economy have begun to feel it – to the extent that credit lines in dollars have closed or have become more expensive. The Banco de la República, Colombia’s central bank, will face a big challenge on this issue next year, although in recent days it has made key decisions in order to inject liquidity into the market and avoid business fallout. It must be recognized that banking, the heart of the economy, does not seem to be in danger in Colombia. Although banks abroad are falling like cards, the Colombian financial system is strong, and all indicators used to assess banking health show that the patient is able to resist threats from abroad.

On the fiscal front there will also be tensions. Although the government holds that it has a guarantee from multilateral banks to cover external credit requirements for next year, it won’t be enough to finance all budget expenditures. The government estimated tax income for an economy to grow at 5 percent, a figure that won’t happen. That is to say, the government will start 2009 needing to apply a substantial cut in expenses. According to Fedesarrollo, a think tank, tax revenue will grow by 10 percent while expenditures will rise 17 percent.

In the midst of this dim scenario, there is one subject that worries analysts a great deal: the government’s poor capacity to react. While other countries such as Chile, announced emergency plans to stimulate the economy in an attempt to dodge the global crisis, the Colombian government has shown itself to be naïve, believing that it won’t be hit as hard. “We don’t see decisive action here; there are no proposals. The government meets to talk about minor issues. The economic front is left out of the government’s agenda,” said the dean of Economics at the Universidad de los Andes in Bogotá Alejandro Gaviria to SEMANA.

For many countries, investment in public works could become a lifesaver. That’s what Mexico, Chile and even China have announced. The expectation is that local Colombia government leaders will undertake the public works in 2009 that they did not in 2008. The Banco de la República forecasts that public investment will grow, because the cities have the money. That remains to be seen.

Given this difficult outlook, it is worth looking back in time to examine whether an opportunity was lost during the last four years, when the country grew at more than 5 percent. Everything shows that it did. Now the country can only hit itself for not have followed the ancient rule of saving during the good times to be able to get through difficult times such as these.