Keynes vs. Thanos
Coronavirus cases in Colombia have been steadily rising, to 702 as of March 29th. The early rise has been faster than in Italy, Spain or United States – but seems to be moving in tandem with the rest of the region. Government experts have stated that, under a no-measures scenario, Colombia could see four million cases. But the Duque administration has already decreed a nationwide lockdown, at this point to April 13th, and a 30-day state of emergency. Additional restrictions and extensions seem all but inevitable.
We expect to see heavy impacts for a protracted period, even after the pandemic ends. We have computed three scenarios for 2020 economic growth: mild, resulting in 1.1% growth; intermediate, with a no growth; and severe, leading to a 3.3% contraction. The COP weakens in tandem with growth. We foresee it at 3.550 to 3.700 per dollar by yearend.
Economic policy is staying true to its gradualist nature. The size of the stimulus announced so far falls short of full-blown, likely awaiting conditions to justify further measures. The state of emergency allows the government to legislate by decree. Initial measures, among others, allow for unrestricted health spending; the temporary suspension of VAT on health-related imports, the provision of financial support for firms that maintain employee payrolls; and the extension of additional supports for the poor.
A key policy issue -- in our opinion much more important than monetary or fiscal support – is that the lockdown period must be used to radically improve diagnosis and isolation of COVID-19 cases. If that doesn’t happen, and the lockdown is protracted, no monetary or fiscal package can stave off a considerable economic downturn.
The recent oil price collapse will hit oil revenues and profits, with cash-thirsty firms producing to weather the shock. We hope that, when sense returns to this industry, the Colombian authorities should allow wide exploration, and exploration of non-conventional hydrocarbons. Under a sensitivity exercise we performed for 2020 and 2021, we project that Ecopetrol dividends could fall from about COP 11 billion to COP 5 billion to 9 billion. Oil industry tax collection could drop from nearly COP 8.6 billion to COP 3.5 to 8 billion, and fiscal loss could be 0.3% to 1% of GDP. Adding likely new coronavirus-related spending, of 1% to 2% of GDP, the full impact of foregone revenues and additional financing for 2020-2021 would be 2% to 3% of (one year’s) GDP. The government will have to accept that its current package is too timid, and that Thanos will have to be confronted with aggressive Keynesian measures.
Recently the influential analyst Gabriel Silva proposed selling Ecopetrol. We disagree, not only because the current share price is absurdly low, but because, as long as it is well managed, Ecopetrol is more profitable than a private company managing the same Colombian assets would be. That’s because its main owner, the state, deducts taxes and royalties from its costs, which go to the same pool as dividends. Were Ecopetrol privatized, part of its output could be lost. It should not only be kept state-run and well managed, but should also be allowed to extract non-conventional hydrocarbons.
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