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April 18, 2016
With the second term of Colombia’s President, Juan Manuel Santos, due to begin on the 7th August 2014, it came as no surprise that the first name to be included in Santos’ cabinet was the finance minister, Mauricio Cardenas. Aided by Colombia’s investment boom, the country grew an impressive 6.4% during the first quarter of 2014 in comparison to the same period last year. With Cardenas claiming that the second quarter is to yield similarly strong figures the government is rightly raising the country’s growth forecast this year from 4.7%. Considering that Argentina has defaulted yet again and the current Latin America trend producing growth figures less than 2%, Colombia’s positive outlook is a breath of fresh air. Following the end of the commodity boom, the region is seeing its lowest growth figures since 2009. The gradual fading of the era of cheap money as central banks in the developed world prepare to raise interest rates plus a series of home-grown factors are beginning to take their toll on the nations of Latin America.
At the end of 2013, Peru looked set to be soaking up the limelight similar to Colombia. In spite of Peru’s economy minister calling the suffering economy a mere ‘hiccup’ estimations of growth of more than 4% in Peru this year seem rather ambitious. This sudden slowdown in Peru came as a shock in a country that was enjoying Asian-style growth averaging 6.4% a year from 2003 to 2013. With the field wide open, Colombia has stepped in and overtaken Peru to become the fastest growing of the larger Latin American economies. Considering both Peru and Colombia are medium-sized commodity exporters with open-market economies and part of the Pacific Alliance, the obvious question of why Colombia is faring better than Peru needs to be addressed.
The principal reason as to why Colombia is thriving whilst Peru is fading rather rapidly is due to the fact that Colombia’s main exports are oil and coal whose prices have remained stable over the past couple of years. Peru on the other hand depends on copper and gold for 50% of its exports and especially in the case of gold, both prices have fallen sharply. While Colombia’s exports value only fell slightly, Peru slipped quite significantly down by 9% in 2013. Colombia has also introduced a number of reforms which has helped the country’s situation. In 2013, Colombia’s government organised lower mortgage rates in alliance with banks and a public subsidy which in turn boosted construction that is growing at a rate of 10% annually. With the subsidy being withdraw, $200m of public money leveraged an outstanding housing investment totalling $2billion. On top of this, formal-sector employment has been growing 8% a year and with a shrinking informal sector, productivity in Colombia has got a welcome boost. With an improving economy and reduction in the public sector deficit, Colombia has gained the confidence of investors and in March 2014, J.P. Morgan doubled the share of Colombian bonds in its emerging market indices.
What has been termed as a complicated year for Peru, the Peruvian Sol depreciated by about 9% in 2013 as a direct consequence of the deteriorating terms of trade which in turn raised the financing costs of some careless companies in Peru. Contractions in other areas such as fishing and farming due to the weather as well as a reduction in investment by region governments due to cases of corruption and technical limitations has led to further setbacks. To try and gain control of the situation the Peruvian government have been throwing money at the economy with extra bonuses and wage increases for state employees and extra small business loans. The emergence of new low-cost mines should see the rise of copper production by 20% in 2015 and construction will begin on public-private partnerships worth $18billion including a gas pipeline and second metro line for Lima.
Although it is common opinion that Peru will regain its lead over Colombia, it is by no means assured. Peru’s long growth spurt has been based on a mixture of catch-up after a crippling 1980s, sound economic policies, cheap natural gas and most importantly a massive mining boom. However, now that Peru has caught up with the other leaders of Latin America, the fall in mineral prices and delays in mine development have already negatively affected Peru’s potential rate of growth. Colombia on the other hand is quietly confident they can sustain the position with new motorways set to raise the country’s GDP growth rate by 0.7% over the next 4 years. A deal with the FARC guerrillas would also add extra points of growth potential in the agricultural and energy sectors due to new investors. However, Colombia needs to remain mindful of a number of risks, especially in relation to the country’s declining oil reserves. What can be concluded is that although Colombia now has an edge over Peru; both are much better placed than the vast majority of their South American neighbours.
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