Having our cake and eating it too?
This year may mark the end of stagnation in financial deepening. Outstanding commercial loans in May finally started growing faster than nominal GDP growth. Still, it’ll be a few years before commercial credit-to-GDP ratios rebound to 2015 levels. Will this be enough to take the economy to healthier 3.5%-4% growth rates in the years to come? We think that’s possible, but recovery will depend significantly upon the health of the world economy, and the recovery of Venezuela. There are also domestic factors, such as high minimum wages, murky prospects for housing construction, and lack of clarity over which sectors will be the key growth drivers.
Privatizations are always supposed to imply a trade-off: the government receives money today by selling the asset, but foregoes the future dividend stream from the asset being sold. Let us hope that the government, through “clever” maneuvers, isn’t trying to have its cake and eat it too (by having government funds buy some key assets or making the Ecopetrol group make non-strategic investments). That might help finance the deficit, but in a very unconventional manner. We think this is not the way to go.
In his July 20th Independence Day address to install the new Congress, President Iván Duque understandably painted a rosy picture of his presidency. He pointed out that his administration had modernized the tax code, had promoted entrepreneurship and had helped Colombian products reach new foreign markets. Foreign investment grew 68% in Q1 2019, tax collection is increasing, and the fiscal deficit should fall to 2.4% of GDP by yearend.
Though it’s not a bad list, it might be not good enough. It is unclear, for instance, whether Duque’s government is addressing key issues, such as providing security to most of Colombia; fulfilling the peace conditions agreed upon with the FARC; designing a foreign policy clarifying Colombia’s stance vis-à-vis Venezuela, Latin America and the world; defining a view of the energy sector, the largest source of hard currency, exports and growth; improving prospects of tradables other than oil, coal and cocaine; imposing effective management of the very inefficient and confused public sector; and forming a working coalition with the very Congress he was addressing.
The most frequent complaint about Duque is the lack of a clear vision, to act as a compass for his administration. Since this speech was basically an enumeration of separate initiatives, our impression is that the president wasted an opportunity to correct his course of action. The biggest obstacle of his first year was his administration’s weak governing power in Congress, and vis-à-vis key social actors – and Duque unfortunately failed to explain to Colombians how he would address this issue during his second year in office.
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