2017: A year of big challenges, but Colombia is well placed to respond
Although Colombia has successfully navigated through a very difficult economic cycle, the strength of the Colombian economy is being tested once again. Its gradual slowdown is a result of the plummeting oil price, the instability of international financial markets and the reduction in investor appetite for risk. This volatility caused the US dollar to reach a record value of COP3,409 in February, 2016.
One of the big challenges of 2017 will be to tackle the Colombian fiscal deficit and overcome the potential adverse impact on investment and growth of the announced tax reform. For this, Colombia has already identified the need to find new sources of growth after the fall of oil prices starting in 2014 and the reduction in international liquidity. Industry and infrastructure look to be the key areas for development.
However, 2017 will ultimately be remembered for the outcome of the peace process between the Colombian government and the FARC guerrillas, which was well underway by mid-2016, and which is expected to have a very positive impact on the economy.
The key tools at Colombia's disposal:
GDP expanded by 2.5% during the first quarter of 2016 in accordance with the market’s expectations. The leading sector has been the manufacturing industry, up by 5.3%, mostly as a result of the Cartagena Refinery’s (REFICAR) operation, which soared by 20%.
Today, Colombia has the most modern oil refinery industry in Latin America according to the complexity index (which measures the ability of an oil refinery to convert oil into derivatives). This index rose from 4.5 in the old refinery to 10.5 in the current one. Undoubtedly, a very positive result when compared with the index showing the best US refineries that are in the order of 12. REFICAR's project doubles its capacity in the refining process, rising from 80,000 bpd to 165,000 bpd (in full operation). It is estimated that production of REFICAR in full operation will be 82% of low sulphur diesel (75,000 bpd), naphtha export (30,000 bpd) and petrol (30,000 bpd).
The refining sector is an increasingly important sector, representing about 11% of heavy industry. During the period from January to September of 2015, the refining sector fell by about 4.6%; however, by 2016 the national government has estimated that it will still contribute 5.8% to overall industrial growth. The implementation of REFICAR represents a valuable opportunity for the petrochemical industry to develop high value-added products and for the other sectors of the economy that are part of the industry value chain.
The rest of the manufacturing industry’s performance was less spectacular, aside from beverage production, which expanded by a whopping 16.5%, arguably due to an unusually warm first quarter of the year. Nevertheless, in 2017 there are many sectors that have the potential to emerge, such as the textile industry, footwear, food and agribusiness, which had been suffering because of the impossibility of exporting in previous years, but are now benefiting from a favourable exchange rate.
Colombian entrepreneurs face the big challenge of improving their competitiveness in the current climate, as well as in product innovation and business creation. For its part, the Colombian government is on track with its commitment to improve infrastructure so that domestic products are really competitive. There is no doubt that Colombia is seeking to be efficient in both its production and its economy as a whole. However, a key factor is going to be international competition affected by the worldwide slowdown.
Housing Construction and Civil Works
Another sector that is emerging as very dynamic is construction, which has grown by 5.2%. However, the greatest part of the expansion came from the construction of housing and other buildings, which was up by 10.9%, and civil works, which reported a growth of 0.4%.
With regards to housing, this result is not surprising considering that in 2015 the second version of the plan called 'Plan de Impulso a la Productividad y el Empleo' (PIPE 2) was launched, one of whose components is the housing programme, ranging from free housing that is assigned to vulnerable Colombians, to the subsidy programmes for the interest rates charged for average housing, namely housing up to a value of COP200 million (USD68,000).
With regards to civil works, and after five years of hard work, the programme of road concessions known as 4G (fourth generation) began. Work is already underway to build 30 of the 55 highways that will interconnect by road all the national territory, shorten travel times, improve road safety and decongest traffic in large cities. Nine highways are also to be constructed by public-private partnerships of private initiative with an investment of around USD3 billion.
Historically, the construction industry has made a significant contribution to employment not only through direct jobs but also indirectly through hiring in connected sectors. The total direct and indirect employees that will be generated with the 4G should reach 200,000, representing a decrease of unemployment by at least one percentage point.
By analysing the GDP growth in Latin America countries for the first quarter of 2016 compared with the same period of last year, Colombia, Mexico and Peru recorded the largest increases, but in Colombia the added value of construction stands out. This trend is expected to continue during 2017.
Other important developments:
Peace talks between Colombian government and FARC
23 June 2016 will forever be a historic day for Colombia. The Colombian government and FARC guerrillas took a momentous step after four years of negotiations. With the whole world as a witness, President Juan Manuel Santos and FARC signed a ceasefire agreement bringing to an end one of the world's longest running conflicts and more than 50 years of bloodshed.
The conclusion of the civil war is expected to increase foreign investment, foster exports, improve domestic consumption and allow the Colombian government to divert funds from the war effort to social investment and economic welfare. The overall positive impact of the peace is estimated at between 1.1% and 1.9% in GDP.
Privatisation of public sector companies
After the national government successfully transferred 57.6% of the shares it held in power generator ISAGEN for COP6.5 billion - money that was intended to co-finance the construction of the 4G highways - the national government and other government entities have now set their sights on the sale of other state-owned businesses. During 2017, a new wave of privatisations is expected in a variety of sectors, including insurance, energy and petrochemicals.