Introspection at the end of 2020
Balance of payments data show that the current account deficit continued to shrink, from a 3.6% of GDP deficit at the start of 2020, to 3% in Q2, then 2.7% in Q3. While this reduces the economy’s exposure to financing gaps, the reduction deserves a closer look. The improvement in remittances and factor payments was sufficient to offset an additional deterioration in the goods and services deficit, which rose from 4.3% of GDP to 4.6% between Q2 and Q3. The latest trade data show that some of this year’s trends persist, while others are starting to shift in line with the economy emerging from the depths of the downturn. Both exports and imports continued to decline in Q3. The collapse has been dramatic, especially in exports, from 3.2% of GDP at the beginning of this year, to 1.2% now.
It is reasonable to expect that the CAD will deteriorate for the first time this year relative to GDP, despite eventual pickup in oil exports. The strengthening of the COP during Q4 has been associated with financial flows, as the FCL has been disbursed and investors have moved away in droves from safe havens, in search of greener pastures in expected profitability in emerging markets. It is important to voice our concern about these huge portfolio inflows entering the economy in Q4. They could be creating a false sense of tranquility, masking the deterioration in the current account to levels that continue to be an Achilles’ heel.
Electricity demand suggests November was not necessarily a good month in economic activity. December is looking better; economic activity could end the year at close to December 2019 levels. That said, the COVID case trajectory is not pointing in the right direction.
Finance Minister Alberto Carrasquilla should be undergoing a quite introspective period, of Roman or Shakespearean proportions. Two of his best friends, former and current Colombian representatives to the IMF, Roberto Steiner and Leonardo Villar, did not support his bid to become the new Central Bank governor. We have the impression that Steiner and Villar were part of a larger game. Economics and politics are too shallow to describe what was at stake; only a novel could delve deeply enough. Carrasquilla has literary inclinations, and his two friends like to read. Let us hope that in a couple of years the former produces a fiction piece that lifts the veil over what happened during the first week of December 2020.
Carrasquilla would prefer a tax system covered by a simple regime, which exempts all formality requirements from starting corporations. As those companies grow, they should become fully formal corporations. The minister would love a regime that requires a universal income statement, in which everyone files taxes and the state knows its economic reality. He also expects to propose a labor and a pension reform. For a minister supposedly on his way out, it seems an extremely ambitious agenda. “At this moment,” he said in an interview, “we have 80% of the population of retirement age without a single peso of pension; that is unacceptable in a civilized country.”
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