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Americas Economy
Colombia braced for effects of oil’s fall
From the Financial Times of Sun, 21 Dec 2014 14:04:50 GMT

The currency has fallen by a quarter, the share price of the national energy company has halved and a low-intensity war rumbles in the background amid hopeful talk of peace. Yet this is not Russia, but Colombia.

South America’s best-performing big economy, and Washington’s closest ally in the region, has been caught on the hop by the 45 per cent fall in oil prices since June.

Colombia produces almost 1m barrels a day and oil accounts for more than a half of exports, a sixth of government revenues and 80 per cent of foreign investment inflows. But unlike other oil exporters such as Russia or neighbouring Venezuela, there is little talk of a pending economic crisis in Colombia, or even a drastic slowdown.

Although the oil price drop will hurt the country, and widen its twin fiscal and current account deficits, growth this year is forecast at almost 5 per cent, more than twice the regional average.

“The oil price fall will surely have some impact on growth next year . . . of some decimal points,” Mauricio Cardenas, Colombia’s finance minister, told the Financial Times. “We will have to plan for a low oil price scenario for a while . . . We are well prepared, although that does not mean we are absolutely shielded.”

There are several reasons why Mr Cardenas is for now sticking to growth forecasts for next year of more than 4 per cent. One is the country’s peace talks with the Marxist Farc guerrillas, which aim to end a 50-year rebel insurgency. An agreement could bring a peace dividend that Mr Cardenas estimates may be worth 2 percentage points of economic output.

Peace, for example, would end rebel attacks on pipelines that caused $500m of lost output this year — almost as much as the $550m the government estimates has been lost because of lower oil prices.

Last week, the Farc offered a unilateral ceasefire to help speed the peace talks, held in Havana over the past two years. The government, wary of ceasefires that have been used by the rebels to regroup in past failed talks, has hitherto refused such offers.

The other reason why Mr Cardenas can put on a brave face is that Ecopetrol, the national oil company majority owned by the state, will pay its taxes to the state based on this year’s higher average oil price.

“The blow to the fiscal government is cushioned . . . by Ecopetrol,” wrote Francisco Rodriguez, an economist at Bank of America Andean.

Nonetheless, some investors have reversed their views of Colombia, until recently a market darling. In the second quarter of the year, as JPMorgan doubled Colombia’s bond weighting in benchmark indices tracked by foreign investors, the peso was the world’s best-performing major currency, after South Korea’s won. Since July it has become the third worst, after Ukraine and Russia.

Likewise for Ecopetrol, briefly Latin America’s most valuable company last year when its market capitalisation rose to $129bn — larger than Brazil’s Petrobras, which produces three times as much. Ecopetrol’s market value has since shrunk to $31bn, and the company has slashed next year’s investment budget by a quarter to $7.8bn.

We are well prepared [for a fall in oil prices] although that does not mean we are absolutely shielded

- Mauricio Cardenas, finance minister of Columbia

Such cutbacks have prompted worries about knock-on effects to the broader economy. Reduced oil revenues will widen the current account deficit to an ominous 5.1 per cent of gross domestic product, Credit Suisse forecasts.

They will also increase the fiscal deficit to 3 per cent of GDP, Bancolombia estimates, even though the weaker peso increases the local currency value of dollar-denominated oil exports.

Although the government has recently pushed through tax increases to help close the budget gap, next year could require a further fiscal adjustment. This “could involve reducing public investment or increasing debt”, notes Bancolombia.

Since June, yields on Colombia’s benchmark 2024 hard currency bond have widened by 30 basis points to 3.8 per cent — versus comparable Brazilian bond yields of 4.3 per cent or Venezuelan bond yields of more than 22 per cent — so raising foreign capital should not be hard. By contrast, cutting public spending would offset the counter-cyclical stimulus that has seen local construction and infrastructure investment grow at double digit rates.

It could also jeopardise the social programmes the government aims to put in place to reintegrate as many as 8,000 demobilised rebels should the government reach a Farc peace deal.

“As the commodities boom comes to an end, the country’s capacity to sustain growth will be negatively affected . . . possibly offsetting any further boost from improved security,” said Mr Rodriguez.

“Further tax hikes are likely,” added Maria Luisa Palomino at Eurasia, the risk consultancy.

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