Let’s not celebrate growth results just yet
Economic activity data showing 2.1% real growth in Q2 2024 over Q2 2023 suggests that the economy might be changing gears, and accelerating, from its meager 0.8% growth in Q1. Key sectors that have been clear laggards, such as construction and commerce, are finally moving into positive territory. Though manufacturing is not there yet, contraction seems poised to end. Public administration, education and health, all bundled into a single big sector, continues to grow by around 5%. Finally, agricultural sector growth jumped by a surprising 10.2%; all the main crops, including coffee, posted strong results. Only oil and mining continued to disappoint, continuing to dive into negative territory.
So though not yet out of the woods, things seem to be moving to greener pastures. Or are they? Using monthly ISE data, the growth picture changes: the economy as a whole grew 5.7% in April, slowed down to 2.4% in May and shrunk by 1.1% in June. Moreover, electricity demand suggests economic activity remains subdued in Q3. Even though it grew slightly y/y in July, in August it is about to close with the worst contraction since early 2021. This is not good news at all, and puts into question the government’s narrative about economic recovery beginning Q2.
The Gustavo Petro government once again announced its intention to present to Congress a new version of the health reform plan, after the last version failed to win approval in the Senate’s 7th Committee. Remember that after that negative vote in May, the government took control of the largest EPS (the insurers within the system, Sánitas, Nueva EPS); the other systemic EPS (Sura) decided to go out of business; and other smaller EPS’s were also intervened, via the Health Superintendency. The fiscal impacts of this so-called reform may be huge -- and uncertain -- which we imagine is precisely why the Ministry of Finances has not yet given its fiscal consent. Combined with the pension reform, the medium-term fiscal impact of the health reform may be simply impossible to pay under any plausible tax scenario in the next 10 to 20 years. Even more importantly, the nightmare seems to be never-ending, and will certainly continue for the rest of the Petro administration. But this time the nightmare is linked directly to human suffering and lives. It seems that the only solution now is to pray to not get sick.
In many economic topics, Petro opts for unearthing long-buried and forgotten policy measures. That is the case of the so-called “forced investments” imposed on the financial system, a mechanism frequently used in the 1970s and 1980s, and remaining for marginal funds currently allocated to agribusiness. Facing a slump in credit, the technical staff of Finance and Superfinanciera proposed reviving forced investments on financial institutions, to be allocated to small firms and so-called micro-credit.
The amount proposed was COP 55 trillion over the next 18 months, equivalent to 3.2% of GDP. Analysts and politicians reacted negatively, and a partially unfair rumor spread rapidly, claiming that the government wanted to confiscate private savings deposited in the banking system. Calls flooded radio stations asking whether people should retrieve their deposits before it was too late. It was by then unrealistic for the government to ask Congress to approve a Forced Investments Act. It instead opted for moral suasion, which has already worked miracles for the healthcare sector, the private pension funds and the power transmission firms.
Is there moral risk? I.e., might untrustworthy potential lenders ask for politically motivated loans without seriously intending to repay them? Our answer is yes, and government officials maintain that agencies like FINAGRO and Bancoldex (mostly oriented toward export promotion) currently work at half speed and with better governance, something this administration still needs to learn about, the plan could achieve some badly-needed vigor in lending. Only time and execution (another front in which this government is found wanting) will tell.
Two well-reputed independent members of Ecopetrol’s BOD, Juan José Echavarría and Luis Alberto Zuleta, resigned on August 27th. Their letter of resignation shed light on the opaque process of decision making within the largest Colombian corporation. On July 31st, the BOD was informed that Petro had ordered Ecopetrol CEO Ricardo Roa to reject a recommended acquisition of 20% to 30% of the assets of the Occidental Petroleum Company-owned Crownrock Project, because a) investing in fracking is bad; b) the investment required debt; and c) it implied sending resources abroad (not really, since the project was to be financed by Wall Street loans). Echavarria and Zuleta believe the project was essential to the future of Ecopetrol and its 250,000 shareholders. They stressed that Ecopetrol contributes about 4 ppts of GDP to Colombia through taxes, investment, royalties and dividends, equivalent to total state spending on education; 1.5 times the spending on pensions; and 2.1 times the spending on national healthcare. This episode of political meddling in Ecopetrol is deeply worrisome, not only because it has material consequences for the future of the most important corporation of Colombia, but also because it signals the arbitrary criteria applied by just one person, the Colombian president, on an asset that belongs to millions of shareholders. Many other firms with a public sector majority are now subject to similar interference.
Now read on...
Register to sample a report