EKIP– Expert Club for Economics and Politics A Different Opinion
At the height of World War II, Sir Winston Churchill described Russia as "enigmatic and shrouded in inner mystery" – a quote that could be successfully applied to modern Colombia.
Large periods of the South American country's modern history have been marked by violence, drug trafficking and terrorism, which have undoubtedly left a deep mark on its lifestyle and culture. Many investors still perceive it as a high-risk market, representing an opportunity with many unknowns. Today's Colombia, however, is far from the image it has been given over the years by the media and the film industry.
First of all, the country has an exceptionally beautiful nature – numerous mountain peaks, sparkling sandy beaches, lush tropical jungles, inexhaustible biodiversity and most importantly for future investors – a liberal business environment and a rapidly developing economy. As a result of the government’s targeted policy of fiscal stability and security, Colombia’s economy has recorded unprecedented growth over the past decade with an average annual rate of 4.5% for the period. For comparison, Brazil, one of the favorites of market entrepreneurs in Latin America, achieved significantly lower growth of 3.8% over the same period.
The Colombian economy continues to grow this year. In the first quarter of 2012, GDP grew by 5.1%, even more than the Ministry of Finance and Public Expenditure ( Ministerio de Hacienda y Crédito Público ) had projected for a 4.5% increase.
Colombia's long-term aspirations are aimed at rejecting its poor historical heritage in order to develop the country's great economic potential. The common direction towards which both the government and the private sector are striving is helping to overcome the economic stagnation of the past. The single goal that is emphasized is the creation of an economic environment favorable to foreign investment and the development of successful business.
Foreign direct investment and the liberal Colombian economy
The growing foreign direct investment in Colombia is a direct result of the economic liberalization undertaken by the current president, Juan Manuel Santos. He served as Minister of Finance from 2000 to 2002. His policies have allowed both the state-owned oil company Ecopetrol and many foreign investors to explore and produce in the country. The policy of economic deregulation, which stands in sharp contrast to most Latin American countries (including Argentina and Brazil), has given an additional boost to the strong growth. The American company Chevron has invested significantly in the development and production of natural gas in Colombia. In 2006, an offshore drilling contract was signed, resulting from the extension of the natural gas export agreement to Venezuela. The country has seen significant growth in investment in the energy sector by small and medium-sized companies, including Canadian companies Pacific Rubiales, Gran Tierra Energy and Petrominerales.
Foreign direct investment in Colombia almost doubled between 2010 and 2011, reaching $13.2 billion. In the first three months of 2012, the inflow was $5.9 billion, a 28% increase over the same period in 2011. The Ministry of Finance and the Central Bank of Colombia predict that by the end of the current year, an increase of 21% will be achieved compared to the previous year, thus reaching $16 billion in investments. The majority of investments are directed to the oil and gas sector, followed by the mining industry, financial and manufacturing services. The rapid investment expansion is an important catalyst in the rapidly growing Colombian economy and is the main reason for the appreciation of the Colombian peso against the US dollar.
The positive business environment and domestic demand
Another sign of Colombia's growing economic strength is the increasing urbanization of the country's population and the steady increase in the number of residents successfully completing secondary and higher education. This inevitably leads to an increase in demand for consumer credit, products and services. It is indicative that retail sales in the first half of 2012 increased by 6% compared to the same period in 2011.
The strengthening of domestic demand is also supported by the 1.9% growth in industrial production in the first half of 2012. Escalation of demand is observed mainly among confectionery, meat, beverages and transport services, followed by steel and iron and non-metallic minerals.
Another positive indicator of the growth of the Colombian economy is the reduction in unemployment, which has fallen by 31 percentage points over the last decade to 10.4% in June 2012. The progressive decrease continues in the current year, with the decrease in June being 1.5 percentage points compared to May 2012 and 0.5 percentage points less compared to the level in April 2012.
The global economic crisis and the growth of Colombian exports
Since 2008, Colombia has progressively registered a trade surplus. The reason lies in the expansion of exports of oil, natural gas, coal and raw materials to strategic trading partners. For the first quarter of 2012, total exports increased by 22% compared to the same period of the previous year, contributing to the reporting of a surplus of $1 billion. At the end of the first quarter, Colombia's key trading partners were the United States (38% of total exports), followed by China (6.6%), Spain (5.8%), the Netherlands (4.5%), Chile (3.8%) and Venezuela (3.5%).
Despite a significant slowdown in Chinese economic growth and the deepening European financial crisis, Colombia achieved a significant increase in total exports. For China alone, the increase was an impressive 227.9%, mainly due to higher sales of fuels and mining products. Strengthening relations with the world's second-largest economy bodes well for further export growth in 2012.
Another factor that increases the possibility of economic growth in 2012 is the signing of a Trade Promotion Agreement, which entered into force on May 15, 2012. It complements the already existing free trade agreement that Colombia has with MERCOSUR and Canada.
According to President Juan Manuel Santos, Colombia should make the most of the Agreement, which could add another 10% increase in exports by the end of the year alone. The result would be an almost 1% increase in economic growth and the creation of about 300,000 new jobs.
Possible risks facing the Colombian economy
Due to the export-oriented nature of the Colombian economy, its growth is highly dependent on global demand for goods.
The country remains troubled by ongoing insecurity. Economic liberalization and increased foreign influence have prompted the guerrilla organization FARC (Revolutionary Armed Forces of Colombia) to launch attacks on oil and pipeline infrastructure. While these incidents cannot be seen as a major obstacle to economic development, the government is aware that any significant escalation in the activities of armed groups could seriously affect the economy. This is especially true for the oil and tourism industries, which could have a very negative impact on foreign direct investment.
The Colombian economy is certainly poised to post another year of strong economic growth. The government continues to strive to provide a favorable business environment for investors, even as global demand for oil and other commodities continues to decline. Economic growth will also be supported by growing domestic demand, as well as increasingly serious relations with the world's two largest economies, the United States and China. Colombia also represents an excellent business opportunity for those investors who are seeking to expand their market share in Latin America but are unwilling to risk the deepening recession in Brazil or the escalating political crisis in Argentina.
