LatinFinance - September/October 2015 - 95

investors at bay. The FARC and a smaller
guerrilla group, the ELN, have attacked
pipeline infrastructure 49 times this year,
according to the Colombian oil producers'
association.
Foreign direct investment in the first
half of the year was $6.85 billion, down 13%
year-over-year. Separately, portfolio investments were down 28% in the same period,
totaling $4.25 billion.
Declining oil prices are also the root
cause of the major depreciation of the peso,
which started collapsing in 2014 and fell
nearly 30% in the first eight months of 2015
to stand near a 12-year low against the dollar. The depreciation had been welcomed,
but the steady decline and big drop in
July - just above 8% - has started to create
concern about inflation.
A lower peso is good, says Rupert Stebbing, managing director of equities at
Bancolombia, "as long as inflation is not
imported". He adds that it "would be much
more beneficial if the industrial sector had
more to export".
Dutch disease
The Colombian peso had been gaining
ground for nearly a decade. More recently,
the currency skyrocketed due to huge
windfalls from crude oil prices topping

Cautious confidence

Mauricio
Cárdenas

$100 a barrel and a rally sparked in March
2014 when JPMorgan increased the weight
of Colombia's peso-denominated debt in
its bond index. The move generated huge
inflows and the peso's value jumped.
Inversely, the peso started its decline
when the bottom fell out of oil prices and
JPMorgan trimmed its weighting of the local
currency instruments in its index.
President Juan Manuel Santos' government has been bullish on the peso's depreciation, seeing it as a necessary boost to
the country's manufacturing industry and
its exports. An increased manufacturing
output and the anticipated boom in agriculture have not materialized, however and
analysts fear that Colombia is dealing with a
classic case of the Dutch disease, as foreign
currency inflows into the extractive sector
over the past decade have undermined the
industrial sectors.
"Manufacturing has flatlined since 2007
while the economy grew on average by 5%
annually. Now, we are not going to see an
increase in manufacturing just because
there is a weak peso," says Glossop.
Constraints in the labor market and
on capital goods will keep manufacturing from becoming the avenue to growth
forecast by the government, Barreto says.
A turnaround in manufacturing is possible

because of the lower peso, but it won't be
significant in the short-term.
"The theory (of depreciation) says that it
is good for manufacturing and agriculture,
but exports have not grown. These sectors
have suffered for 10 years under a strong
peso and expecting them to recuperate
overnight makes no sense. It will happen,
but not soon," Barreto says.
Crops and conflict
Agriculture remains a tricky issue for Colombia. The government had hoped for
a big boom in agriculture with resolution
of the five-decade conflict with the FARC
and expansion of the country's transport
infrastructure. Talks with the FARC, which
were supposed to take months, continue to
drag on and attacks, while fewer, have kept
investors cautious. Infrastructure has improved and is set to meaningfully advance
by the end of the decade, but projects have
taken longer to materialize.
Scrapping restrictions on the accumulation of land by agribusiness is critical for
agriculture, Barreto says. The government,
however, faces stiff opposition from farmers' groups and from Congress to any
modifications that could be seen as increasing land concentration. Colombia has one
of the most inequitable land distribution

Despite a battering from low oil prices, Colombia's growth remains set to outperform the region next year. Finance Minister Mauricio Cárdenas spoke to
LatinFinance about the factors behind the optimism, as well as concerns about
depreciation, import demand and the impacts on manufacturing and agriculture.
Here is an edited transcript of the conversation

LF: What is allowing the economy to expand by [finance ministry forecasts of ] 3.6% this year, given the IMF and others are lowering their forecasts?
MC: We are going to grow six to seven times more than the regional
growth, which the IMF has now lowered to 0.5%. Several factors explain
this.
First, the construction sector is growing at a robust rate because
of public works and housing remain very dynamic. The other aspect,
if you look at it from the aggregate demand point of view, domestic
demand is expanding at rates over 4%, which explains why the economy is able to grow above 3% this year. Domestic demand will remain
strong.
The other aspect I would mention is the depreciation of the Colombian peso. We have a floating exchange rate and the magnitude of the
depreciation has been quite significant. This explains why imports are
falling, especially in consumer goods that can be substituted with domestic production.
Those are the main factors behind the relatively strong numbers we

expect for this year.
LF: In terms of depreciation, are you concerned that there
could be a pass through?
MC: So far, the inflation numbers are not showing a large pass
through. The depreciation began at the end of last year and we have not
seen any inflationary pressure coming from the exchange rate. However,
we are still vigilant to see that this does not happen.
This is, of course, an issue that is of concern, but so far the pass
through is relatively low in part because Colombia has a relatively closed
economy. As a percentage of GDP, our exports plus imports do not add
to more than 20%.
LF: The other point you mentioned has to do with imports. Imports fell by 18% in both April and May. Are you concerned about
the drop in imports?
MC: Yes, certainly in the case of capital goods. In this case, we are
concerned because this could be showing a deceleration in investment.
This is not positive news.
continued on page 96

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