The Miami Herald
September 5, 2001

Recession over, but Colombia at delicate stage

Growth in 2001 disappointing

 Special to The Herald

 BOGOTA -- With President Andrés Pastrana's government drawing to a close and elections due next May, analysts fear this could be a volatile time for Colombia's
 economy because electoral periods here customarily bring nervousness and rising interest rates.

 Colombia's economy is at a delicate stage. While it has recovered from its 1999 recession, growth has been disappointing in 2001. The government has made significant
 progress in fiscal reforms and successful foreign financing, but urban unemployment is at 19 percent, one of the highest levels in Latin America, while exports have
 slumped and demand is depressed.

 The guerrilla conflict, heading for its 40th anniversary, continues to prevent the country from fulfilling its economic potential, and there are fears that the violence could intensify still further ahead of next May's elections.

 Furthermore, the worsening global outlook has hit Colombia hard. While the government began 2001 predicting growth of 3.8 percent, up from 2.8 percent in 2000, it lowered that target to 2.4 percent at the end of July. In late August, when it reported first-half growth of just 1.6 percent, analysts began to fear even the revised 2.4 percent prediction was overly optimistic.

 Finance Minister Juan Manuel Santos blamed world economic conditions and predicted a recovery in the second half. ``We are not going to fall into recession,'' he said.

 The lack of growth could also lead Colombia to revise the fiscal deficit target it had agreed to earlier with the International Monetary Fund. The country has cut its
 combined public sector deficit to 3.7 percent of gross domestic product (GDP) last year, from 5.4 percent in 1999. But the 2.6 percent target for this year looks vulnerable, as tax revenues will likely fall in the slowdown.

 ``I think investors could take any revision quite negatively . . . they have been burned in the past and there is very little patience for not meeting IMF targets these days,'' said analyst Santiago Millan of HSBC Securities in New York.

 A central problem has been a slump in exports. They pulled the country out of recession last year, but oil production has been severely hit by an increase in guerrilla
 attacks on pipelines as well as natural depletion of reserves.

 The Cano Limon oil pipeline, second most important in the country, has been attacked more than 110 times so far in 2001, up from 98 in 2000, putting it almost
 completely out of action for 5 1/2 months. Crude exports, which last year made up 35 percent of Colombia's export income, fell 31 percent to $1.6 billion in the first half of the year.

 The coffee industry is also suffering, with international prices in the doldrums and exports of just $369 million, worth 38 percent less in the first half of 2001, compared to the same period last year.

 One hopeful sign is that nontraditional exports -- $3.4 billion in the first half of 2001 -- were up 15 percent over the comparable period in 2000.

 But analysts point out that the main market for its exports is the sputtering U.S. economy, and that any bad news there will also hit Colombia's next biggest markets,
 Venezuela and Ecuador.

 There are few ways to increase domestic demand while unemployment remains at current levels. Credit is hard to come by, with banks still wary after struggling to bring levels of expired loans back within reasonable levels after the 1999 crisis. The coffee crisis means that the 500,000 families who earn a living from the industry are struggling to make ends meet.

 Some analysts also say the government's tax reform, introduced at the end of 2000 to increase revenues this year by around $1.65 billion, has dampened demand. ``I don't see where the recovery the government expects in the second half is going to come from,'' said analyst Ricardo Durán of the Bogotá brokers Corredores Asociados.

 But, as the government points out, few countries in the world have not lowered their growth expectations this year, and there has been progress on other economic fronts. The government has passed two difficult and key fiscal bills in Congress -- raising the sales and financial transactions tax and passing a revenue-sharing plan meant to make transfers from the central government to regional authorities more flexible. Without a majority in Congress, the government was forced to compromise on content, but the reforms are at least in place.

 The next challenge is to save on pensions by raising the retirement age and increasing compulsory contributions from employees and employers, which Santos has said should go before Congress by the end of December. This is the most unpopular of the three fiscal bills. After more than a year of trying, the government has been unable to reach an agreement with opposition politicians and workers' unions.

 Inflation has remained in line with IMF targets, coming in at 8.75 percent last year and likely to be less than 8 percent this year. The government secured its $2.7 billion foreign financing needs by the end of May and has begun pre-financing for 2002. It also carried out a successful swap of domestic treasury securities in June, lessening its amortization costs over the next four years.

 A major objective in both cases was to ease financing needs around the electoral period and therefore keep interest rates within bounds. All these measures will also help cushion Colombia from any emerging market crises in the near future.

 As the elections approach, much will depend on how investor-friendly the front-runners are felt to be. At the moment, polls suggest that Conservative Pastrana will be replaced by veteran Liberal Horacio Serpa, or one of two independent candidates, Alvaro Uribe and Noemi Sanín.

 ``I think we've seen the campaigns of Serpa and Uribe move in a much more market-friendly direction recently,'' said HSBC's Millan. A Serpa administration would also likely include Santos, which would signal consistency in economic policy and lower investor fears.

                                    © 2001