No Man’s Land
The October 25 Colombian elections have shown that Colombian politics nowadays is “no man’s land”. Despite the fact that Vargas-Lleras is the front-runner for 2018, these elections left him as a lone ranger, without firm multi-party support. On the other hand, the loss by the political left in Bogota shows that Colombians are now even more suspicious of the left as a realistic alternative, reducing the probability of a leftist candidate winning the presidential race.
Under what the government promised would be a program of “intelligent austerity,” spending under the proposed 2016 budget was initially slated for a 12% cut – but after reworking by the government and Congress, was cut by just 3.7%. So, the latest version of the budget is apparently more intelligent, but less austere. Investment increases were made in sectors considered key amid peace negotiations with the FARC, such as agriculture, social inclusion, education, the environment and mining.
The current account deficit is the government’s top concern right now – as it should be. The National Planning Department predicts that the deficit will reach 6% of GDP by year-end – its highest level in recent history. This is due to the plunge in oil exports, which, from comprising 8.5% of GDP in 2013, are expected to fall to 5.8% this year. Currency weakening should make Colombian goods more attractive to external buyers, but hasn’t so far. Non-traditional exports have been falling for most of the year.
Falling capital inflows is another problem. FDI in the mining sector has fallen by $2 billion so far, although this has been partly offset by a moderate rise in capital inflows to other sectors.
External imbalances are growing and worrisome. We expect the COP to continue to depreciate, although more moderately than in the past few months. Even though a weaker currency can boost exports and help correct external imbalances, its excessive volatility and significant depreciation could also be interpreted as a lack of trust in Colombia’s macroeconomic climate.
Manufacturing shows signs of rising from the dead. Both output and sales have shown positive growth for the past three or four months, behavior not seen at least since 2013. The large and important textile and oil refining sectors lie behind this recovery and account for almost 30% of manufacturing output. This is further good news, because oil refining, which represents almost 20% of total output, is expected to keep growing, with the Cartagena refinery about to go into full production.
The not-so-good news is that manufacturing employment is not concomitantly positive. This is hard to interpret, as it may either show that productivity is growing – which would be a welcome development – or that growth is viewed as temporary, inspiring firms to keep the lid on hiring.
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