A delicate, short-lived disconnect between politics and economics
Countries that entered the COVID-19 crisis strong are likely to emerge stronger, and those that entered weak may leave in an even weaker state. The crucial issue will be actions during the crisis. Three issues common to all strategies are: 1) saving the health care system and preventing the pandemic from getting out of hand; 2) helping families whose incomes have suffered; and 3) saving firms from insolvency. The problem is that the three sides of this triangle are at odds.
The unprecedented lockdown-driven downturn is taking economic forecasts well into uncharted territory. Scenarios are repeatedly updated with ever-bleaker prospects. But uncertainty is part of the problem – in part because of limited ability to assess recovery. The latest growth forecasts point on average to 2020 contraction of around 4%, similar to the -4.2% seen in 1999.
Though President Iván Duque’s popularity has risen, as the public generally approves of the government’s management of the crisis, the lockdown has so far been extended three times, now to May 27th. Though health conditions justify this, the longer lockdown lasts, the deeper the economy sinks, and the further rebound capacity wanes -- wearing on people’s patience.
Add that Colombia’s fiscal package is smaller than those announced by neighboring countries, and the dangers grow evident: a larger downturn, plus a shorter-lived disconnect between economic activity and presidential popularity – though the government’s habitual gradualism seems to be slowly giving way to bolder measures.
A new state of emergency was declared on May 6th, since the more than 70 decrees of the first one apparently were not enough. Many topics would be addressed in tens of new decrees. In tandem, the 2020 national government deficit is allowed to expand from 4.9% to 6.1% of GDP.
Colombia has access to additional financing, first, via multilateral credit ($3 billion, 1.2% of GDP); second, from an IMF FCL ($10.8 billion, 4.4% of GDP); and third, via direct Central Bank lending, as a last resort. Minister Carrasquilla seems reluctant to raise the deficit further. From this perspective, the equilibrium that has raised Duque’s popularity is delicate and unstable. The need to reopen the economy is urgent.
Ecopetrol disbursed contingent credit lines with Scotiabank ($430 million) and Mizuho Bank ($235 million), and has issued new debt for $2 billion. It has thereby strengthened its cash position, from about $3.5 billion to $5.7 billion, which should last well into 2021.
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