Colombia revisited

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April 2015
Ivan Obolensky
 
It has been a couple of years since I was last in Colombia and several since I have written about that country (see Thoughts on Medellin). I thought I should write an update on the changes I have observed since that time, having just returned. From a personal perspective, it is a country I have fallen in love with over the years and to which I wish great success.

This article will be divided into two parts: an overview of the economy followed by what I observed on the ground.

The economy:

Overall, various reports suggests that low-crude and declining commodity prices are creating a braking force on the Colombian economy. Exports have slumped and the peso has depreciated from about 1,800 pesos to the US dollar in 2013 to that of close to 2,500 pesos to the dollar recently. Further, the loss in oil revenues has prompted the government to reduce its budget by cutting back spending primarily on infrastructure and administration. 1

This revenue decline is expected to extend into the future. With 94% of governmental spending thought to be fixed, the government will have to decide whether to promote regulatory changes to adjust these allocations, or raise taxes. Neither of these choices are ideal, but how this decline will be offset must be addressed because Government spending is a significant driver of Colombia’s growth and has a direct influence on construction activity and infrastructure development.2

The Colombian stock market, the Bolsa, has also experienced rough going. It has retreated sharply since September, 2014. The GXG, the Colombian Index Exchange Traded Fund that trades on the New York Stock Exchange, peaked at over 20 in September of 2014 and last week closed just under 12.

More importantly for the Bolsa is that there have been significant changes in the makeup of stock market participants. Buyers in the form of pension funds and individuals have become net sellers while foreign investors now make up a much larger portion of the market and have been net buyers at least until the end of 2014. This trend has the potential for increased market volatility going forward. If these foreign funds are repatriated (a distinct possibility) there will be substantial selling pressure. 3

The logic behind this conclusion is that Markets and financial systems do not operate in a vacuum and are influenced by external events. Global political, economic, and financial risks have been rising which have the potential to affect Colombia adversely. Economies abroad have remained sluggish at best while their debt levels, both private and public, have been increasing.

Foreign central banks continue to promote low interest rates and possible future injections of liquidity to stave off any potential downturns. Such actions have managed to keep the world economies moving, but the possibility of a default that will echo around the globe has not been eliminated. Foreign investment is not restricted to the stock market either. Many infrastructure projects require foreign investment as well as public and private funding. Lack of foreign inflows could stall future growth.

Although this is not the happiest of economic pictures, it need not portend a dire future. The stock market is not the total reflection of an economy by any means, and economic potholes are a common occurrence in all economies.

Although external circumstances can slow growth, ultimately it is driven from within.

Going forward Colombia’s success hinges on a few key factors that it can control. These are:

  1. The development of its infrastructure,
  2. Colombia’s ability to eradicate graft,
  3. The maintaining of individual and corporate indebtedness to reasonable levels,
  4. Colombia’s ability to deal with and handle internal hostile elements.

Lest one gets the wrong impression, GDP growth will likely not be negative at least for some time. Colombia is growing at over 4% which is greater than the majority of countries around the world.

Reports on an economy tell the economic story from a statistical point of view.

To gain additional perspective, personal observation is often required.

Absent from these reports, but nonetheless significant from my perspective, are two of Colombia’s greatest resources. The first is its people. They are friendly, willing to work hard, and determined to succeed. The second is the land, itself. It has to be seen to be believed. It is one of the most beautiful countries in existence.

My Observations:

I have not visited all of Colombia so my observations are narrow and focused on only a small part of Antioquia, namely Medellin, its capital, Rionegro, Gautapé, and the surrounding areas. Antioquia is a department that is in itself huge, and when added to all the other departments makes up Colombia, which encompasses an area greater than that of Texas and California combined. Just the same I have been able to observe changes.

Coming from California, what immediately struck me was the greenness and lush growth even in the city of Medellin. It rained every night with frequent thunderstorms that were truly spectacular. The temperature was a comfortable 72. The humidity, while often high, cleared when the skies opened up in the afternoon. The city was a glittering jewel at night. Verdant growth is everywhere: along the streets, in open spaces, in the gardens, and on the terraces. In spite of all the buildings, it is a green city.

The second thing I was able to confirm when I asked local residents what bothered them most about Medellin, they answered in one word: traffic. Extraordinary is probably too fine a word. Rush hour was a constant stop and go with a lot more stop than go. In El Poblado, a section of Medellin, because of the steep hills, drivers perform a never-ending dance of clutch, accelerator, and handbrake. Everyone drives a stick shift.

The other observation was that motorcycles were everywhere. The majority of them (at least 99.9%) are under 150 cc. It was told to me that every worker gets paid a transportation allocation over and above their salaries. The cost of a brand-new motor bike is approximately 1,200 US dollars. These can be obtained easily and paid for through the allocation. As a cheap mode of transport, there is probably nothing better; however, the number of accidents has risen sharply not only because of the congestion, but because there are no driving skill requirements for these vehicles. This makes for exciting moments. Since traffic is likely to slow to a standstill fairly often, the car driver has to be aware that motorcycles can be threading through traffic on the right, the left, in front, or behind all at the same time. Whether in rain, shine, or thunderstorm, motorcycles were beyond count. What was particularly thrilling was driving through them up the hills of Medellin. It was like wading through a flock of fast moving sheep that run along at 20- 30 mph (30-50 Km/h Colombia measures speed and distance in kilometers). My only conclusion was that Medellin must be the motorcycle capital of the world.

In addition to the transportation allowance, all workers have the benefit of pension plans that are required by law. Colombia is aware of the disparity of wealth and for some time the government has been endeavoring to do something about it. The Gini coefficient, which is a measure of the distribution of income, or the difference between the haves and the have-nots, stands at 0.53 well above the average for OECD countries (most developed countries) which come in at 0.31.4

One of the reasons for the congestion is road construction. In El Poblado, a series of bridges is being built to shunt traffic over particularly bad intersections, but this is an ongoing process that is likely to last a few more years. Until it is finished, everyone has to make do. Locals get to work early, so traffic starts to build before 7 am, and the traffic going home runs heavy at least through 7:00 pm. The road construction techniques I observed were modern and technologically advanced, but they were so widespread, it was a wonder one could navigate anywhere at all.

Building of high-rise apartment buildings is also pervasive. Medellin has forests of skyscrapers. Tower cranes everywhere, and new buildings growing higher and higher with many at the thirty-story level.

In October of 2013, a newly constructed building collapsed, which put a focus on construction techniques and placed the industry under a microscope. Rumors of graft and corruption abounded. Improvements in oversight were implemented, but the exact causes are still under investigation. Graft is still an issue that needs to be eradicated. Several building projects in other cities have been stalled, or have to be redone, because of it.

The most striking feature of the people themselves was that they looked good. Most everyone looked to be in their twenties, or early thirties. Where were all the old people? The average age is much less than that of developed nations, which might explain it. Although I did eventually see a few older folk because I started to look for them, the majority of both men and women looked like they walked out of a Guess jeans advertisement. Compared to the US, there was little obesity and this proved true across all social classes. Billboards flashed youth and vitality in large advertisements, and in shopping malls posters displayed young mothers with small children. Colombia, like most Latin American countries, is extremely family-centric.

School children were numerous with each one in uniform, even in remote rural areas.

Education is taken seriously in Colombia although it needs to increase the number of those who attend universities and training trades to maximize the benefits from the increase in prosperity, which in a two-year observation period was patently obvious.

The increase in construction, traffic, vendors, and motorcycles does not deter car purchases by residents. The number of late model cars I saw was significantly higher than in the past. El Poblado is truly prosperous. The BMW count was up along with the number of Mercedes-Benzes. Audis were everywhere. In earlier times there may have been the feeling that to drive a fancy car would invite robbery. Not so today. Employment is up across-the-board.

There is a growing concern amongst the locals that malls are continuing to either expand or be built, resulting in over-expansion. Foot traffic was about the same in volume as I have seen in the past, and depending on the mall, even on a weekday it was significant, but I saw fewer people with shopping bags.

One of the concerns of a burgeoning consumer base is the use of credit to promote sales. Perhaps significantly whenever I used a credit card at a store, the salesperson asked whether I wanted to be billed in one payment, or up to twelve. This to me was an interesting sales gimmick, but on the other hand, it might also be an indication of the how easy it is to put goods on a payment plan. With unemployment decreasing and prosperity much in evidence, it would seem that this is not a problem, but that can be deceptive. Economic downturns can and do occur, and these can put real pressure on all parts of a society including banks who find that they over-extended credit.

Expansion from Medellin has also spilled over the top of the highest part of the Valley of Aburrá into Rionegro. Development has progressed at a furious rate. Whether this was the result of residents looking to avoid congestion or wanting more space, the number of condominiums, hospitals, houses, stores, and office complexes has increased dramatically in the last couple of years.

The overall quality of the roads connecting Rionegro to other parts of Colombia was also much improved. I saw a significant drop in the number of potholes. There were also more buses. Bus service between cities has shown a significant increase in numbers as well as ease and comfort.

The better roads have also helped agriculture. Locally produced product such as tomatoes were restricted to the local area due to the lack of resources to distribute them. Not so today, agricultural products are moving out to other areas of Colombia and even other countries.

Rionegro, which in the past was a somewhat sleepy town, I found crowded and packed with people.

Although my visit was short, from what I observed, points 1-4 of economic success above are a good summation of what Colombia needs to do to be the leading powerhouse of Latin America.

I have kept number 4, internal hostile elements (namely the FARC and the paramilitaries) until last. It is the one I feel least qualified to comment on although I have heard many different views. Almost everyone I have talked to has been affected in some way by one, or both groups. Peace negotiations are ongoing but there are significant economic consequences for both peace and ongoing hostilities.

In an economic sense, the consequences of peace may, or may not, be substantial. By this I mean two things: with infrastructure being destroyed by ongoing guerilla actions there is an economic cost for allowing the FARC and paramilitaries to remain outside the arms of the government. Peace on the other hand also has a cost. There is the expense of assimilation in terms of education, land for peace, the creation of new agrarian areas, and compensation for those who have been harmed by the conflict, which in a strong family-cultured population, has a significant and lasting emotional cost that is difficult to measure. 5

Just the same, eventually the conflict must be resolved.

One taxi driver mentioned that if not for the paramilitaries, how were poor owners of farms to stand against narco-trafficking criminals that the army cannot possibly protect?

I am not remotely qualified to even offer a solution to this. I can understand both the arguments for peace and for eradication by force. Regardless, a solution has to be found one way, or the other.

Colombia is too large, too beautiful, and filled with too much possibility to deny itself a workable solution.

I thank the people of Colombia for their hospitality and warmth. Each time I have visited I return inspired, refreshed, and rejuvenated. Thank you.

 


 

  1. N.A. (2015). Colombia Economic Outlook. Retrieved April 20, 2015 from http://www.focus-economics.com/countries/colombia
  2. N.A. (2015). Evolution of the Colombian Equity Market. Retrieved April 20, 2015 from Grupo Bancolombia website.
  3. N.A. (2014). Economic Analysis, Macro economic Outlook 2015, The Colombian Economy in 2015: The Silver Lining of a Slowing Economy. Retrieved April 20, 2015 from http://investigaciones.bancolombia.com/inveconomicas/sid/31569/2014111208054850.pdf
  4. Ibid.
  5. Ibid.

 

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© 2015 Ivan Obolensky. All rights reserved. No part of this publication can be reproduced without the written permission from the author.

 

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