Mon | Dec 18, 2017

Walter Molano | Colombia: Waiting for the peace dividend

Published:Friday | October 6, 2017 | 12:00 AM
In this September 19, 2017 photo, President of Colombia Juan Manuel Santos Calderon addresses the 72nd session of the United Nations General Assembly. (AP Photo/Richard Drew)

As members of the FARC move into their encampments, and the last weapon caches are demobilised, Colombians are waiting to cash in on the peace dividend.

At first glance, it is nowhere to be seen. The Colombian economy grew at an anaemic pace of 1.2 per cent year-on-year during the first quarter and 1.3 per cent year-on-year during the second quarter of this year.

However, a closer look at the data suggests that the country is undergoing an important transformation that will put it on a more sustainable path. The main reason for the lacklustre growth this year was the weakness in the oil sector.

At the start of the century, Colombia shifted most of its resources into oil production. The move was astute, since it allowed the country to take full advantage of the subsequent oil boom. GDP soared, but little of the bonanza was saved.

To make matters worse, the Colombian economy also developed many of the symptoms of Dutch disease. To begin with, the private sector began to ignore the other areas of production. This was underscored by the fact that oil became the dominant part of the export accounts.

Of course, this left the economy extremely vulnerable when oil prices plunged a few years later. As a result, the Colombian economy sank into the doldrums. Fortunately, the peace plan has brought new life to sectors that were once off-limits. As a result, the country will shake off its dependence on oil and enter into a more sustainable phase of economic expansion.

Agriculture and tourism are the two sectors that are poised to take off. Some of the best agricultural land in Colombia was located in conflict zones, such as the llanos and the Caqueta. Now, agricultural producers are rushing to buy up land in these fertile regions.

Agriculture's contribution

According to DANE, the national statistics agency, the agricultural sector expanded by seven per cent year-on-year during the first half of 2017. This was much more than the pace of growth that was registered across the rest of the economy.

A recent study by the National Planning Ministry found that agriculture could boost the level of total GDP by about 1.9 per cent year-on-year. The sector is already having a positive effect on employment, and it could add another US$20 billion in exports.

Tourism is another sector that is turbocharging the Colombian economy. Tourist arrivals were up 21 per cent year-on-year during the first half of this year. Dozens of new hotels are being built in the major cities, and tax incentives are inducing some hotel operators to start operations in post-conflict zones. Ecotourism has enormous potential in Colombia, with its enormous biodiversity and jungle regions that stretch across the Amazon, Pacific coastline and the Darien.

Agriculture and tourism could push the Colombian economy into a potential growth rate of 5.6 per cent year-on-year, making it one of the fastest-growing economies in the region. There are signs that this is starting to take place.

Industrial production was up 6.2 per cent year-on-year in July. The large increase was exacerbated by a low base. Last July marked the truckers' transportation strike that brought the country's industrial sector to a standstill. Nevertheless, correcting for the low base still indicates a healthy recovery.

The other encouraging sign is the unemployment rate. Despite the economic malaise, the unemployment rate remains low. Tourism and agriculture have been credited for absorbing much of the excess labour force. The tourism sector alone employs four million workers, and the number is expected to rise dramatically over the next few years.

Not surprisingly, Colombia is lining up as one of the hottest investment destinations in Latin America. Foreign direct investment, or FDI, is expected to reach US$36 billion. This is a healthy number, given that Brazil brings in about US$70 billion in FDI, but it has an economy that is more than four times larger.

The core sectors

Not to be left behind, the Colombian government is doing its part to help push things along. An ambitious infrastructure programme is providing the conduits to facilitate trade and commerce. The government is focusing its efforts along four major sectors, airports, highways, railroads, and ports.

Billions of dollars are pouring into these sectors, thus providing the country with the channels of transportation needed to negotiate its treacherous geography. Riddled with steep mountain ranges, endless swamps and broad rivers, the country needs a modern infrastructure to overcome these challenges.

About half of the funding is coming in the form of foreign investment, but the rest is coming from the country's well-endowed financial sector. Last of all, the downturn in the oil sector is starting to revert. Drilling is on the mend, and an estimated US$4.2 billion is expected to be invested in the sector.

All of these developments are creating the diversification that the Colombian economy needs to create a much more sustainable model that will allow it to confront the vagaries of the international commodity markets.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com