Davids beat the Goliaths
Many an analyst is puzzled that the Central Bank has been holding interest rates constant, while its regional counterparts have started cutting. And the fact that the Bank’s next move next year might be a hike is considered by some to add insult to injury. But we don’t see a puzzle: Colombia is in a different phase of the business cycle than other Latin countries. Inflation is edging toward the ceiling of the target range, and the current account deficit remains stubbornly high.
There is ample evidence that the economy is gaining momentum, driven mainly by household demand, and the business community is optimistic. We think the Bank’s stance makes sense: it is supportive of growth but unwilling to provide additional stimulus for now.
Yet consumers are not optimistic. So, the real puzzle is the disconnect between the way households perceive their situation and the spending and debt decisions they’re making, which are mainly responsible for the state of the economy. Our working hypothesis: due to polarization, discontent with corruption and a lack of strong political leadership, consumer confidence may have shifted to a lower normal. Patience with non-economic aspects of daily life seems to be running low. So bad news could push public opinion to the brink -- and eventually into the streets.
Record turnouts in the October 27th regional elections delivered remarkable outcomes, among them the victories of Green candidate Claudia López as mayor of Bogotá, and of independent candidates in other key cities: Medellín, Bucaramanga, Cartagena and Cúcuta. And 24 of the 32 governorships were won by candidates of coalitions, comprising colorful mixtures of all kinds of parties. They may either organize their cabinets in an independent and positive fashion, or could end up in the exact opposite position, governing amid political chaos.
For traditional parties the results look grim: the Liberal Party lost two of its four governorships, and Cambio Radical lost all five. The U Party lost one of its two, and Conservatism lost two of its four. Neither President Iván Duque, nor senators Álvaro Uribe and Gustavo Petro, nor politician Sergio Fajardo can claim that their presidential aspirations have substantially advanced. All of their political movements face an upward climb in the runup to the 2022 presidential elections.
Long-murky plans for pension reform may turn out better than expected. The system’s main problems are weak coverage, lack of financial sustainability and - a corollary of these two problems – the fact that the system is highly regressive. Unfortunately, the recent setback of the financing law in the Constitutional Court has made discussion of virtually any bill nearly impossible, let alone a project of the magnitude of pension reform. The huge electoral blow for the government, and the ruling Centro Democrático, and may end up imposing even more governability limitations in Congress.
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