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Introduction to Colombian Economy

The Colombian Economy has been growing exponentially over the last ten years, because of the confidence and business ventures that the investors have found in this emerging market. In recent years, foreign investors have seen Colombia as an emerging destination for more secure investments.

The economy is expected to speed up quickly this year on raised oil prices, which should incease investment in the extractive sector. Proposed construction projects and rising investor confidence stemming from reduced political uncertainty should help lift growth. Duque’s plans to slash corporate taxes, however, could present challenges in meeting the fiscal target, unless they are offset with new sources of revenue. Colombia expects a GDP to grow 2.7% in 2018, which is up 0.1 percentage points from last month’s forecast, and 3.1% in 2019.

According to a report by PwC, Colombia is one of the countries with the best economic outlooks for the next 35 years, thanks to an increase in investment and improvements in education and technological development.

Colombia offers an attractive business environment by:

· Strengthening the macroeconomic variables together with a dynamic economic performance. The GDP per capita has doubled over the last decade, going from USD 5.826 in 2000 to USD 10.350 in 2012.

· A dynamic domestic market, being the 23rd largest population of the world and the second most populous Spanish-speaking population.

· It is the third most business-friendly and the leading reforming country in Latin America.

Growth is expected to strengthen gradually over the 2018-2020 period, with growth accelerating to 2.7 percent in 2018, and further to 3.6 percent by 2020, supported by higher oil prices, stronger private sector demand, and a pick-up in implementation of the 4G infrastructure

program.

Foreign Trade Performance and The Use of Trade Restrictions

Of Colombia’s National GDP of $6,377 USD per capita, 35% of that was from Foreign Trade which equals $2,231.95 USD per capita, with the average being 31.38% since 2012.  For an economy to rely this much on foreign trade it needs to have relationships and powerful training partners in order for them to stay afloat. Colombia has trade agreements with The Andean Community which allows for free trade between Bolivia, Ecuador, Peru, and Venezuela until they decided to leave.  Colombia is also in talks about a Free Trade Agreement with Turkey and Japan. When talking about bilateral trade agreements, they have a few with nations like Switzerland, Peru, Spain, China, India, and The United Kingdom. What we notice about these nations is that most of them are developed. This is because developed nations need to piggyback on developed nations for certain resources or terms of trade in a Most Favored Nation situation.  With this growth for the economy is possible. They also have an agreement with the United States called, The US Colombia Trade Promotion Agreement in 2012. The terms of this deal was that 80% of US exports to consumers and Industrial Products are duty free and the remaining Tariffs are payed off over a ten year span at 14.6%. This plan also cause the Labor Action Agreement. The Obama Administration pushed for there to be labor rights in Colombia.  This is good for the Colombian Economy and community because it will enforce companies to pay fair wages and give fair humain hours and benefits to their workers. Other trading partners for Colombia reported in 2017 are China, United States, and neighboring countries. Since Colombia is a developing nation we observed that they are an import dependent nation where they are 98 of 121 countries in foreign trade balance. This is because they are a small nation and need to rely on help of other nations who are abundant in resources that Colombia does not produce in a beneficial matter. The ratio of imports to exports in relation to national GDP is 20% imports to 14.77% exports. When reviewing the import growth from the United Kingdom, Ecuador, Spain, and Free-Trade Zones, we noticed that their import growth from these partners is greater than export growth to the rest of the world meaning that these nations give more to Colombia each year and they are becoming more dependent on the products coming from these countries than anywhere else in the world. Where it is the opposite for nations like, US, China and Mexico. When we look at exports we see the export growth is greater than export growth to the rest of the world for nations like, Mexico, Turkey and Korea, but the opposite for the US, Turkey and The Netherlands.  Colombia’s top five exports are Crude Petroleum, Coal Briquettes, Coffee (Number two distributor globally), Refined Petroleum and Gold. Their top five imports are Refined Petroleum, corn, wheat, soybean meal, and soybeans. Refined Petroleum is on both lists because the resale market is large in Colombia for this resource. They continue to become more and more import dependent but it is in hopes to eventually become self sufficient and profitable in all aspects of each trade.

But in spite of all that, Colombia’s new government has to face some challenges. The first one is the orientation of the macroeconomic policy, especially the stabilization of prices, more employment and equity.   

The second challenge this new government has is the implementation of a new tax reform. The request for a new tax reform has to do with the need to relieve the tax burden to business owners, and ways to fight tax evasion. The third challenge involves government spending and the fiscal rule. Meaning a budget reform should be applied to unify in one entity the various budgets.

In general Colombia has new challenges that the new government has to deal with, nevertheless its economy is very attractive for investors and there's definitely a new air of prosperity and stability.

Colombia’s Bi-Directional Foreign Investments

Though Colombia gained its independence in 1810 from Spain, it is still a developing country in today’s world from years after years of corruption. This has led to slow growth for many years. In 1991, the Colombian government underwent an unprecedented period of change in their economic policies. They underwent trade liberalization, which allowed for more free trade flowing in and out of the country. This created a huge uptick in the economy which saw a yearly rate of GDP growth of 7.7%. This allowed for investments made by the country’s people or businesses <bring money?> in and out of the country to help the economy grow. Some of these investments made were called Bi-Directional Foreign investments. A Bi-Directional foreign investment helps an investor, whether living in the country of Colombia or around the world, acquire business assets, ownership, or even controlling interest, that is when a Bi-Directional Foreign investment takes place. With Colombia really gaining economically after their constitution reforms in 1991, Colombia began to experience problems of larger nations. However, it is not fortunate to be a large nation like the China or the United States with diverse revenue streams, so the country of Columbia depends a lot on their trade and its direct investments with other foreign nations. The country also depends on its portfolio investments but there is a difference between the two. Portfolio investments are when an investor purchases equality of foreign based companies.

In 2002 Columbia's Bi-Directional Foreign investments really took a turn for the best. Then president of the country Alvaro Uribe (2002-2010) started to actively promote foreign investments abroad. This only continued following President Juan Manuel Santos promoting investment in other sectors after he took office. Colombia’s main investors into the country are the United States, Panama, and the United Kingdom. Many other countries contribute to the amount of money Colombia receives in foreign investments. In 2016 Colombia's Bi-Directional foreign investments at home totaled $164.3 billion dollars. That number continued to rise in 2017 when these investments totaled a much higher 178.4

billion dollars. Bi-Directional foreign investments abroad for Colombia in 2016 added up to 51.82 billion. These investments grew as well in 2017 when they equaled $55.32 billion dollars. Thanks to the previous two presidents Alvaro Uribe and Juan Manuel Santos that advocated for more foreign direct investments to increase, Colombia is seeing the amount of direct investments coming into the country as to going abroad is almost tripled. Colombia as a smaller and developing country depends on these investments as shown by the amount coming into the country.

Colombia has heavily depended on its mining and energy export, which in turn can make the country vulnerable to fluctuations in commodity prices. In Latin America, Colombia is the fourth largest oil producer along with being the world's fourth largest coal producer, the third largest coffee exporter, and the second largest cut flowers exporter. With foreign direct investments growing in Colombia this allows for all the main exporting sectors for Colombia to grow, especially the oil industry. As the country creates more infrastructure projects and lowers higher corporate taxes, increasing oil prices throughout the world will boost investment into this sector. With Colombia's low interest rates foreign direct investments into the country see the most benefit, as investments will be the key to Colombia's future growth. When Colombia passed laws to stimulate its direct foreign investments in nearly all of its sectors by eliminating restrictions on foreign inflows, this created a privatization program and opened up more foreign investment into the oil industry. Though more foreign investment was to come freely into Colombia, there are a few sectors closed off to investment. These sectors are defense and national security, the disposal of hazardous waste, and real estate in Colombia. The government of Colombia also reserves ownership in strategic areas such as natural resources, but foreign companies may participate in the exploration and exploitation of these resources.

Portfolio Investment Flows: Multinational Companies Activities

In the last years, Colombia has been part of the emerging group of countries that attract resources, during a time in which investors are looking for returns. On an article published by Dinero.com on September 26, 2017. I learned that portfolio investment had an average growth of 10.5% and which led to the re-composition of the portfolio. They talk about how that makes it one of the strengths of the country and a safe source of investment. Author stated “ this year it is expected that the portfolio investment will be between US $ 6,000 million and US $ 7,000 million, and in three years it would have a close increase of  66,7% to US $ 10,000 million.”. Later on, we will be talking about more current data and examine whether or not this year Colombia had an increase in portfolio investments.

In the other hand looking at multinational companies activity, I would love to point out one of the departments or state, that has been presenting a gradual economic growth in Colombia called Valle del Cauca which is located in the southwestern part of Colombia, and faces the Pacific Ocean to the west. Cauca is currently contributing 10% of the national GDP. There are approximately 150 multinationals, that choose this valley because of its strategic location, road, airport infrastructure, and trained human resources. Only in this region in the last five years, foreign investment reached US $ 800 million. The director of Invest Pacific, stated that between 2015 and 2017, 52 companies arrived of which 42 were aimed at the manufacturing sector and 35 of them are exporters. In 2017, 22 foreign capital firms entered the Valley, with an amount of US $ 153 million. Not surprisingly, at the beginning of this year 2018 there were announcements from companies that will invest around US $ 50 million, reported an article published by Dinero on 03/28/2018. Furthermore recently, the World Bank's Doing Business 2018 published a report in which Colombia is listed as  the first country in Latin America to protect investors, and also the third friendliest destination to do business in the region. Which suggest that Colombia is, and will continue to be a good destination for companies that want to improve their business, and expand throughout the region.

As we know, national companies also play a huge part in Colombia’s investments and economic growth, I particularly want to talk about Ecopetrol. Ecopetrol is a oil company, and the biggest company in Colombia which grew almost by 55% between January and August of this year 2018. Ecopetrol is generating an annualized cash flow of US $ 10,000 million, and typically  invests US $ 4,000 million annually. However the concern is that in the first six month of this year it has only invested US $ 1,000 million nationally. One of Ecopetrol strategies to grow even more is to incorporate oil reserves in other countries. Which will be great for the company but could generate tension within the nation because the best scenario for Colombia is for ecopetrol to develop its billion-dollar investments nationally.

Going back to portfolio investments and looking at recent published data I learned that is believed that Argentina’s recent economic difficulties are generating distrust in foreign investors. Also driven by the perception of risk on emerging markets, particularly index funds. According to an analysis of Davivienda Corredores, during August net sales were accumulated for $ 461,000 million, the largest negative flow since November 2015. Believed to be trigger by the perception of risk of emerging market as mentioned earlier. However, other funds would be making adjustments in their portfolios. Overall, portfolio investment destined to the capital market did continued to rise. In April of this year recent data on the balance of the Central Bank indicated that the country had received US $ 2,246.1 million for this concept. Which is actually more than half of the total of 2017, and 14.7% more than what was recorded during that time last year.

Colombia’s Trade and Exchange Rate

First off, an exchange rate is the rate at which one’s currency is exchange for another.

The balance of trade influences currency exchange rates through its effect on the supply and demand for foreign exchange. Moving onto the trade and exchange rate of Colombia, this country has been going through a trade deficit in the past years. If you look at the trade balance of Colombia roughly between the years of 2013-2018, the trade balance is seen in the negative region (CEIC). What is a trade deficit? A trade deficit is when the amount by which the country’s imports exceeds the value of the country’s exports.

By observing their numbers, they are nowhere near a trade surplus in the recent years. A trade surplus is when the value of exports is more than the value of imports. In this case, for Colombia, they are in a trade deficit due to the fact that during the years of 2015-2016, there was an extremely low trade balance of around -2000, which means there were more imports than exports. Another area to look at that also proves that Colombia is in a trade deficit is that in 2016, this country’s exports totals out to roughly $32.9 billion and its imports is approximately $43.2 billion (CEIC). This results in a negative trade balance of $10.3 billion.

Second, there is the exchange rate of Colombia. In 2012, 1 USD was equivalent to roughly 1,820 Pesos. Moving forward to 2018, 1 USD is equivalent to 3,253 Pesos. When I did my calculations, it showed a significant impact of the exchange rate and it went downhill for Colombian pesos compared to the USD. Starting from the year 2014, the exchange rate between United States currency and Colombian currency had a gradual yet massive change. While the U.S. dollar was growing, the Colombian Peso was decreasing. In the years 2015-2016, the exchange rate for Colombia reached its all-time low.

Third, the nominal effective exchange rate or (NEER) is an unadjusted weighted average rate at which one country's currency exchanges for a basket of multiple foreign currencies. In 2010-2014 Colombia exported more which led to not to a trade surplus, but also it led to a lower currency. Within those four years, the amount of imports was nowhere near a negative trade balance. Meanwhile, in the recent years from 2015-2018, the rate is under one, which means that Colombia tended to import more than export which is a trade deficit and a higher currency. Where the country stands in term of how much they import, and export rely on what direction of trade they are in- deficit or surplus.

     Today, Colombia’s financial position seems to be increasing. It is going up because of their exports. Oil prices are changing throughout the nation which is good for Colombia since oil is there #1 export. According to World Bank website, “Growth is expected to accelerate at a gradual pace over 2019-2020, supported by stronger private consumption, a gradual recovery of non-oil exports, higher oil prices…” (World Bank). Colombia is and will benefit financially from their exports that is not only oil, but also coffee, nickel, gold, etc. As growth is seen in the near future for this country, the aspects that will seem to follow would be a boost in productivity, an increase in fixed investment, a decrease in unemployment, and an uproar in competition.

        Lastly, the inflation rate for Colombia in the year 2018 has converged to the targeted range. Stable price expectations and weaker economic activity prompted the Central Bank to reverse its monetary policy tightening. In 2016, Colombia hit the inflation rate of roughly 7.5%, which was their all-time high percentage compared to previous years (Statista). In 2018, the country finally dropped to approximately 3.2%, inflation rate, which is a huge shift in change (Statista). Looking into the next four years up until 2022, Colombia will hopefully plan to stay at the 3% inflation range.

Colombia’s Monetary & Fiscal Policies

Colombia uses monetary policy like most countries by means of their central bank, Banco de la República. Their primary objective of monetary policy is to reach and maintain a low and stable inflation rate, and to achieve a long-term GDP growth trend.

This is the one way to achieve sustained growth rates that will generate employment and improve the population’s quality of life. Otherwise, if the economy does not grow on a sustained basis, sooner or later a crisis will occur with serious consequences for the economy, leading to worsening social indicators, loss of public confidence, lowered investment and higher unemployment. Colombia does this primarily by what they call the Inflation-Targeting Strategy. The board of directors from the central bank determine which approach to take after analyzing the current economy with prospect of future economy. For Colombia, their target inflation rate is 3%. Which means, as long as, inflation doesn’t deviate too much then the economy is robust and strong. To understand the effects of monetary policy is it important to examine inflation by decades:

Colombia’s government involvement in the economy has been marred and riddled in corruption for decades. Still, it has played a major role in strengthening its economic standing and reducing the fiscal deficit through the use of fiscal policy.  Government spending shocks have been found to have significant positive effects on output, private consumption, and employment. To understand how fiscal policy affected the economy let us review the deficit by decades.

Work Cited