Old Wine in New Bottles

COLOMBIA - Report 28 Feb 2017 by Veronica Navas and Mauricio Santa Maria

The government’s new Colombia Repunta (Colombia Picks up) aggregates all of its short-term economic activity-boosting measures. As with previous packages, these are mostly existing initiatives. Though little is new, the government projects that the package will add 1.3 pp of GDP growth in 2017. That would bring GDP expansion to 2.5% this year – flat on December 2016 expectations, before the stimulus package was announced. The two main components are measures expected to boost private sector economic activity, and increased investment. The former is linked to tax reform, with a key measure being tax refund for investment in hydrocarbons and mining. The latter is COP 40 trillion of private and public investment combined, that the Government expects to materialize in 2017.

The giant Odebrecht scandal has involved two 2014 presidential campaigns, and several road construction and river maintenance concessions, starting under the Uribe administration. Gabriel García, the deputy minister of transportation and temporary head of the National Concessions Institute under Uribe, has confessed to having helped Odebrecht win the contract to build what was then the longest road concession in Colombian history, after Odebrecht paid him $6 million, with additional payments for other officials, channeled through former senator Otto Nicolás Bula. Oscar Iván Zuluaga, then a 2014 presidential candidate, traveled to Brazil on Odebrecht’s dime, to hire an expensive and effective political marketeer partly paid for by Odebrecht, which greatly contributed to his near-win against the eventually victorious Juan Manuel Santos. These revelations may severely damage Zuluaga's presidential 2018 presidential aspirations. Though Zuluaga, Bula and García are the first victims of this Brazilian corruption carnival, the debacle adds to many other corruption scandals surfacing, involving health care providers, food for poor children, teachers' pension payments, the Cartagena refinery, votes for Guajira governorship elections, and more.

It’s possible that "outsiders" will now be favored in the 2018 presidential elections. But it’s too early to tell who will win the anti-corruption vote. Another consequence of the scandal is a series of proposals by the minister of interior, to be included in the myriad fast-track peace-linked laws (more than 130!) being approved by Congress.

GDP expanded by 2% in 2016, topping the Central Bank’s estimate of 1.8%, but slowing from 2015. This pace seems reasonable, given the anemic oil sector and slow external sector recovery. Economic activity remains sluggish, and no sector but construction is expected to deliver robust results in 2017.

Furthermore, during its meeting last Friday, and against all odds, four out of the six current members of the Central Bank’s board voted to cut rates by 25bps, bringing them down to 7.25%. As inflation remains high, this leaves a bad taste regarding how the Central Bank is pondering the trade-off between economic activity and inflation, considering that its mandate is exclusively inflation targeting.

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