The Economic Weakness Of Colombia In The Face Of The Pandemic, Risks To Consider.

Photo Natalia Motyl
Natalia Motyl

Bachelor of Economics (UBA). Economic Analyst of Libertad y Progreso.

MISES REPORT – The initial supply shock of the Covid-19 reached Colombia in a year where the country expected, at the end of 2019, to grow above 3%. Unfortunately, the pandemic ended up evidencing the extreme vulnerability of the country. According to World Bank projections, in the best case scenario, the Colombian economy would fall by 5.0% this year, with a rebound of 3.6% by 2021. The Colombian economy, after two years of economic slowdown, It took an upward path again and grew in 2019 at an annual average rate of 3.3%, well above the weak 0.1% average growth in Latin America and the Caribbean. This indicated that, although growth was moderate, the outlook was quite favorable for this year.

However, since the pandemic crisis began, the situation has worsened, creating a climate of high uncertainty in the markets. Colombia has the following explanatory factors of risk sensitivity, which according to its evolution will determine the magnitude of the impact: i) overexposure to oil; ii) high dependence on tourism; iii) high informality rate; iv) worrying upward indebtedness; and v) socio-political instability.

Colombia, almost being a mono-exporting country, is very overexposed to oil, which depends on an exogenous and quite volatile component such as its prices. Despite having lowered its share of total exports from 71% in 2011, oil still accounts for 62% of total exports and 65% of total traditional sales.

Since the beginning of the quarantine, there have been many frictions between the national and local governments. Iván Duque is a president of weak leadership, who must face a positive image of mayors like Claudia López of Bogotá, knowing that this crisis can define the electoral future. This was evident on April 27 when both staged a new clash, while Duque proposed to lift the quarantine in industrial and construction activities, López strongly opposed it.

Another factor to take into account is the high dependence on tourism, the sector most affected by the pandemic. Tourism revenue explains 68% of total service exports. These at the beginning of the decade were around US $ 3.8 billion and amounted to almost double in 2019, US $ 6.8 billion.

Likewise, it should be noted that the main export destinations of Colombia are the United States, China, Panama, Ecuador, Brazil, Mexico and the Netherlands, which represented 62% of total exports in 2019. 28.6% of total sales correspond to the United States and 11% to China, which are the two countries most affected by the pandemic. It is expected that this contraction in world demand will also affect the Colombian economy this year, so it will also depend on the speed with which these countries recover and the economic policies carried out by these governments to mitigate the impact of Covid-19. on rent.

The informality rate in Colombia is very high. Despite the fact that employment was on the rise, the truth is that it is difficult to sustain when out of half of those employed, 13 million are in the informal sector. These groups are the most vulnerable since they do not generate income during the pandemic and cannot, due to their condition, access state aid.

The level of indebtedness is also a very worrying factor. In recent years, growth in external debt has been observed, from 22% of 2007 GDP, today debt as a percentage of GDP already reaches 43% and it is estimated that by 2020 it will reach 65.7%, above the 50% limit established by the CAN in which the debt level in an emerging country like Colombia is not sustainable. The expansion of the Government’s debt is going to be due to both increased government spending to cushion the impact of the pandemic, which has already allocated 11% of GDP, and less tax collection through the reduction of oil exports, explained previously . This could generate a debt crisis in the future, so we must be vigilant if, having adopted an expansive fiscal policy does not lead to long-term structural distortions in an economy that seemed to have recovered the growth path.