The dangers of deafness to suffering
Last year’s 6.8% contraction represents, not surprisingly, the worst economic downturn in Colombian history – and only the fourth year in more than a century in which the economy has posted negative results. Though most sectors, especially manufacturing and commerce, followed overall GDP, agriculture and financial and insurance services grew, while oil and mining and construction contracted by double digits. We expect GDP to rebound in 2021, under a conservative scenario, by 4.2%, vs. the consensus of 5%, although there are many potential upsides to our growth scenario for this year; one should remain wary of the lasting (negative) impact of companies failing, credit slowing and large swaths of the population falling into informality and poverty. The output gap at the end of 2021 will remain quite large.
COVID-19’s negative impact has shown up pretty much everywhere. Until recently, the financial sector was among very few exceptions. Allowing financial institutions to renegotiate payment schedules was appropriate. But in time, COVID showed its ugly face. At the close of 2020 credit growth was losing steam, and non-performing loans were gaining momentum. Fortunately, the financial sector remains sound. The climb out of the downturn will be steep.
Just as we are, people around the world are probably doing computations over national public debt sustainability. We’ve seen a sharp increase in debt ratios since 2012, and especially in 2020. Our beliefs that 50% or 60% of GDP was too much debt for Colombia need to be revisited. Colombia’s current 60% of GDP national public debt is as sustainable as 40%, when interest rates were around 7% (domestic) and 9% (foreign), 10 years ago. The root cause of the rise is the humongous liquidity flooding international markets. Returns are extremely attractive vis-à-vis those of more secure assets, with markets rewarding them despite what in the past would have been deemed excessive debt/GDP. So, these ratios are no longer excessive.
We don’t know how long this situation might prevail. However, in the new monetary and QE accommodation paradigm, in which assets in advanced economies are not allowed to collapse, and any amount of liquidity is to be provided to support valuations, and avoid runs, emerging economies seem to rest comfortably under the umbrella of low-cost debt for the foreseeable future. That’s good for Colombia.
The world in which people had to sweat blood and oil under the tropical sun to service debt has seemingly been replaced by a status quo in which substantially more debt is admissible. We believe that the national public debt/GDP ratio should, under current interest rates, converge toward 50% for fiscal sustainability. Should interest rates keep declining, 60% of GDP could easily be a sustainable level in 2025. It would be a beautiful world, in which what used to be populist profligacy becomes just sound financing for emerging economies’ development. This analysis suggests that the urgency placed by the rating agencies and internalized by policymakers for passing a 2% or even 1.5% of GDP tax reform might be premature, half-baked and pernicious.
The post-pandemic world, in which multiple social equilibria are coordinated by social media and dark forces, may be too sensitive for policy experiments such as the plan for the current tax reform. Chile’s deafness over an urban transport fare increase led to a new Constitution (there, policymakers’ deafness was punished). Similar examples since 1990 in Argentina, Mexico and Venezuela can be provided. Let us hope that our hearing improves, or at least that the consequences for Colombia will be less dire.
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