Colombia’s macroeconomic challenges at the end of the supercycle of commodity prices

ABSTRACT

The end of the commodity boom presents major challenges for the Colombian economy. The major ones relate to the need to reduce the current account deficit and find new growth engines. A competitive real exchange rate is essential for objectives and requires stronger interventions in the foreign exchange market; these interventions also help to smooth out the trajectory of the inflation rate. Finally, although fiscal adjustment has been adequate, there are fiscal needs associated with the additional public sector spending demanded by the peace agreement and the need to correct the major structural tax imbalances generated by previous tax reforms.

KEYWORDS:

• Colombia
• commodity prices
• macroeconomic policy

JEL CLASSIFICATIONS:

• E52
• E62
• E58
• E60
• E65

Notes

¹Following other authors, we refer to the 2007–9 crisis as the North Atlantic rather than the global financial crisis because, despite its global effects, it was concentrated in the United States and Western Europe.

²For a broad analysis of conditions in Colombia during the boom years, see Ocampo (2015a). Comparative data are based on information from the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), the most recent from ECLAC (2016) and ECLAC (2015b) on social conditions.

³The adjustment subtracts from the value of the exports of goods the greater capacity to import generated by the gains in the terms of trade relative to a base year (2003, the year prior to the supercycle of commodity prices).

⁴In particular, we estimated the sectors in which Hausmann, Hwang, and Rodrik’s (2007) indicator of “product complexity” (PRODY) for Colombia is 1.2 times the international average.

⁵Older estimates indicated a pass-through coefficient of 0.064, but the one estimated and used in this exerise is 0.102. In turn, we estimate that the exchange rate rises by one peso per dollar for every US$25 million annual reserve accumulation.

⁶The real credit growth from January to April 2016 was 4.6 percent, and the Colombian Bankers’ Association estimates a growth of 5.5 percent for the second semester.

⁷The estimations assume the probability of a sudden stop of 10 percent and a size of 10 percent (measured by the magnitude of the capital account shock) and a 10 percent GDP loss, a potential GDP growth rate of 4.3 percent, a benchmark interest rate of 5 percent plus a 1.6 percent risk spread (similar to the average of 2010–14) and a risk aversion coefficient of 2.

⁸The most careful estimates of these costs as well as of the benefits from the negotiations are those of Rodriguez (2014) (we ignore here, however, his “ambitious scenario”). See also the careful estimates of a rural development strategy of Misión para la Transformación del Campo (2016). Earlier estimates by Villar and Forero (2014) are also useful.

⁹See Comisión de Expertos para la Equidad y la Competitividad Tributaria (2016).

¹⁰The model assumes a long-term growth rate of 4 percent, an average interest rate of 5.7 percent, estimated as the ratio of interest payments in 2015 to the government debt in 2014.

Additional information

Notes on contributors

José Antonio Ocampo

José Antonio Ocampo is Professor at Columbia University, School of International and Public Affairs, New York.

Jonathan Malagón

Jonathan Malagón is Vice President at Colombian Banking Association - ASOBANCARIA, and Professor at National University of Colombia, Bogotá, Colombia.

Carlos Alberto Ruiz

Carlos Alberto Ruiz is Head of Economic Department at Colombian Banking Association - ASOBANCARIA, and Professor at National University of Colombia, Bogotá, Colombia.