Channeling Yogi Berra
In the wake of the 2014-2016 oil price collapse, the COP/dollar depreciated 50% in nominal and 20% in real terms. Yet exports were far from experiencing a boost. The textbook effect from the devaluation on exports seemed to have stop working. But after the worst effects of the pandemic started to recede, exports started booming, not only recovering from their nadir during the depths of the pandemic, but threatening to break records. Is the textbook effect working again?
Let us look more closely at Colombia’s recent exports, starting with “traditional” goods exports, of coffee, oil, coal and ferronickel. Colombia’s capacity to export these goods should be less influenced by terms-of-trade shocks than other exports. Monthly traditional goods exports jumped dramatically after the worst of the pandemic ended, to about $4 billion per month. These record highs might be short-lived. Coffee and coal sales have been booming, while oil and ferronickel sales have been less impressive. Other goods – the so-called non-traditional goods exports – have also rebounded. Colombia is exporting close to $1.8 billion per month in non-traditional goods exports.
Numerous explanations could be behind this export surge. The rebound of the world economy from the pandemic could be one. For sure it is acting as a driver but, going back in time, previous spikes in world growth did not help Colombia’s non-traditional goods exports. This time world growth is acting as a tailwind, but something else is at play: the exchange rate. The drastic weakening of the currency seems to be finally generating that textbook effect taught in undergraduate macroeconomics courses. When one considers all the worrisome factors behind a weaker COP, this spike in non-traditional goods exports is surely the silver lining. We think the more competitive exchange rate is also doing the trick for services, especially tourism.
2023 will be the decisive year for the Petro administration. It has endeavored to launch Colombia on a productive change away from extractive energy industries, and toward others less costly for the environment. This is going in the right long-term direction, but the administration has decided to adopt it in a reckless period of five years, instead of stretching it out over one to two decades.
In this report, we discuss our two key scenarios for 2023. Recall the Yogi Berra quote: “When you come to a fork in the road, take it.” Although our two scenarios don’t seem that different, each would mark the fork in the road.
Now read on...
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