What Now?
Will Finance Minister Mauricio Cárdenas leave the government in the next political shuffling, to follow the siren call of a 2018 presidential candidacy? Rumor has it that he might. And the rumor may have merit, since President Juan Manuel Santos’ Partido de la U lacks a credible candidate – and it’s well known that the party barons have told Cárdenas that they’d be delighted to have him.
For Cárdenas, an early candidacy would make sense for at least three reasons. First, Vice President Germán Vargas-Lleras has been campaigning all over the country, and has just gained serious political support from some new majors and governors. If Cárdenas wants to challenge him, he’ll need to start campaigning nationally soon, as he’s a political unknown, and has never been elected to any regional or national political office. A second argument for stepping down soon is that 2016 should definitely bring about a tough tax reform. A third is that the VP is apparently on bad terms with Santos.
Inflation is on track to close the year at nearly 6%, its highest rate in seven years, and inflation expectations are still surging. So the Central Bank is likely to continue hiking rates. Market consensus is for a rise to 5.75% in November. The question is: when will the Bank stop? Our short answer: we don’t know.
Pressure on the currency is likely to diminish; the greatest impact has probably already taken place. And even if the currency keeps depreciating, as is likely, it won’t fall by 60% again. We are expecting the COP to reach 2,870 pesos/dollar on average in 2016, a 6% depreciation from the 2015 average. This forecast implies that the excess volatility and overshooting we’ve been observing is corrected, but the depreciating trend is maintained due to the large current account deficit, paired with the eventual normalization of U.S. monetary policy.
The National Planning Department has summarized the main results of the reformed oil royalties distribution system, and the findings are encouraging. Investment through the GRS has been COP 19.3 trillion since 2012, and has been distributed to 8,896 projects. This is roughly less than half of the resources the central government is planning to invest in the 4th Generation transportation program, which should start next year, and resources are being evenly spread around.
The labor market began showing poorer results in August, yet the results have been better than expected. Deterioration of labor market indicators is noticeable, but we’ll have to wait for November’s results in order to gage the true labor market path.
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