We’ve Only Just Begun
Aligning the best and bravest to lead the enactment of the new peace deal with the FARC will be the Santos administration’s main task for the next two years, in addition to winning the plebiscite. As Brexit just showed, winning a popular vote is harder than it looks. The picture of peace being signed is very valuable -- yet the signatures are just the beginning of the story.
Colombia’s fiscal outlook is blurry. The government opted to increase the deficit target this year, from 3.6% to 3.9% of GDP. The higher figure is still consistent with the fiscal rule. The central government deficit was also raised for 2017, from 3.1% to 3.3% -- but even a 4% deficit would be within bounds, the Ministry of Finance says.
Oil prices at $6.4/barrel beneath government forecasts are part of the reason. So is the weaker currency, which has depressed external tax collection as imports have fallen; and higher inflation.
Concerns are greater going forward: the fiscal rule subcommittee decided to use the same oil price forecasting formula as a year ago, resulting in prices that diverge significantly from market expectations, and suggest that lower oil prices are merely transitory. It would have been more transparent to revise oil price forecasts to better reflect current reality. Unfortunately, it’s hard to believe that the 3.3% 2017 deficit target will be met, either.
The government’s latest medium term macroeconomic forecasts reveal significant external imbalances. The 2016 CAD is estimated at 6%, down from 6.4% recorded in 2015, and is forecast to shrink only slowly from here.
The CAD won’t return to pre-oil price crisis levels until 2027, according to Ministry of Finance forecasts. Exports are expected to remain weak, and traditional exports (mainly oil and coal) are forecast to keep falling in GDP terms, to 4.5% 10 years from now, down from 12% of GDP in 2013. The fall in traditional exports is only partially compensated for by a rise in non-traditional exports. This is part of what the Ministry of Finance calls the “new economy,” meant to rely less on oil, and more on new economic drivers, such as manufacturing, agriculture and tourism. But none of these sectors has yet taken off. Hence, the “new economy” idea raises serious doubts about external imbalances. The government says it is confident of being able to finance its CAD, though, mainly via FDI.
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