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Economy

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Finance Minister Cardenas: Colombian oil running out

Colombia OIL RISING STAR

Colombia’s oil supplies will last only eight more years unless new sources are found, according to Colombian Finance Minister Mauricio Cardenas. In an interview with RCN Radio, he said though the majority state-owned company Ecopetrol saw healthy profits last year, it was imperative that they explore for more oil and increase reserves.

Oil represents up to a quarter of all Colombian exports, making the future of its production critical to the successful growth of the Colombian economy.

Cardenas added that attacks on oil infrastructure by various groups, including the FARC, had damaged oil production in the past year. However, he said that the actions of the military have led to an improved security situation: “Since September things have been much better, which has allowed production to rise above one million barrels a day.”

Security is a sensitive issue for the industry with the majority of Colombia’s oil fields found in some of the country´s most unstable regions where the FARC have a significant presence. The outcome of the Havana peace talks will have a marked effect on production.

According to the US Energy Information Administration, oil provides around 40% per cent of Colombia’s energy, with Colombia consuming 200,000 barrels of oil per day and rising. Around half of the oil the country produces is exported, with the majority going to the United States.

Cardenas´warning is not only for the industry, it is a confession that in the long term Colombia must evenutally rely less  on oil as a major engine of the economy, both as an export and a source of energy.

Though not as reliant on the commodity as its neighbours, Venezuela and Ecuador, the insecure position of relying on finite – and environmentally damaging – resources means that the future for Colombia is to explore new forms of energy and to continue to diversify its economy.

Category: Economy, News Review
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Colombia´s infrastructure needs

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Colombia´s road infrastructure in both urban and rural settings makes for difficult transportation and is one of the reasons, as highlighted by the World Bank, for the country’s lack of economic competitiveness. With mostly one lane intercity highways, it often means that accidents or potholes cause long delays and increased costs for delivery; add to this the wear and tear of the vehicles and the movement of goods become less and less economically efficient.

Attempts to rectify this most fundamental of requirements for a modern, functioning country are of course on-going, and progress is being made, but all the work and improvements have come with their own set of challenges causing knock on delays and bottlenecks on already congested roads.

Nevertheless, in ushering in the new year, President Santos announced approximately $40 billion COP of spending on highway infrastructure, which he said would start 30 different projects throughout the country, all designed to complete the famous ‘la Ruta del Sol’.

This ambitious goal and the significant investment attached to it hope to increase employment opportunities and answer the World Bank’s concerns about the stagnating effect of poor infrastructure on the country’s economic development. The flip side, however, is that as the nation embarks on these major highway projects, it is inevitable that long-term negative effects on traffic flow and environmental impact will be felt.

One current example of this is the transvial between Calarcá (Quindío) y Cajamarca (Tolima), which requires building tunnels through the mountains at a length of 8.5 kilometers – it began in 2005, and is yet to be completed. This project, initially expected for September 2013, has faced several setbacks. It has even been suspended a four times, due to unauthorized changes in the blueprints, water contamination in region, and other irregularities. What´s worse, the Instituto Nacional de Vías (Invías) has failed to contract out the electromechanical work, which could mean we´re at least a year a way from seeing the light at the end of these tunnels.

President Santos’ vision of “connecting [the country] and reducing travel time, employment opportunities, road responsibility and security, improvement in the competitiveness of the production sector, and an increase in tourism as one of the main areas of regional development” resonates with the majority of the population.

Though in pursuing these goals, proper and transparent contracting are paramount if such work is to be carried out efficiently and with minimal environmental damage. But Colombia´s recent history is strewn with irregular, badly or corruptly managed contracting. Will Santos´plan work to avoid delays and harm to those living in the regions were the infrastructure is to be laid down? Time will tell.

Category: Comment, Economy
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Colombia’s informal workers benefit little from 4% minimum wage rise

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The Colombian government announced an increase of 4.02% to the minimum wage for 2013 at the weekend, which will now sit at COL$589,500 (US$333) per month and will affect 1.2m workers.

According to Colombian Finance Minister Mauricio Cardenas this figure is 1.4% above Colombia’s inflation rate for the past year.

However the benefits of the increase will not be felt by the country’s large informal sector, which according to DANE, the Colombian National Office for Statistics, stands at 51.3% of the working population in urban areas and almost 60% overall. The real figure is expected to be higher than this, however.

Increasing formal employment is a sticking point for the Colombian government, and President Santos warned earlier this month that increasing the minimum wage by too much would encourage informality. The government claims that its tax reforms passed by Congress ahead of the Christmas break will help combat the problem. However, last week Minister Cardenas announced that a key facet of the reforms to incentivize employers to take on workers formally – the reduction of payroll taxes – will not be implemented until the middle of 2013.

Meanwhile, reaction to the increase was predictably mixed, with the President of Colombia’s Business Council, Rafael Mejia, calling it “prudent” while the leader of the CGT union Julio Roberto Gomez branding the increase “peanuts” and “disrespectful to the working class”. He said that his union would take action and called for the Standing Committee of Wage Policy and Labour which determines the rate to be restructured. Vice President Angelino Garzon, himself a former union man has, since coming to power in 2010, campaigned for further increases to the minimum wage, and is said to be at best luke warm about this recent rise calling the original offer of 3.5% “miserable”.

Category: Economy, News Review
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Pyramid scheme of Interbolsa laid bare

As the fallout from the collapse last month of Colombia’s largest brokerage firm rumbles on, details have emerged of the scale and complexity of Interbolsa’s operations which contributed to its downfall. Colombia’s Inspector General, Alejandro Ordóñez said that the company was the case of a “typical six layer pyramid”.

Brokers of Interbolsa S.A have admitted to being pressured to recruit clients to invest money in the firm’s Premium Captial Fund in Curacao. A client has alleged on Portafolio.co that several brokers have admitted to selling a non-existent products to clients, and that they held little information about how the money was being used in Curacao despite receiving hefty commissions for securing capital from investors for the Premium Capital Fund on the island.

Once the capital had reached Curacao, it was then invested in a number of different subsidiaries in the Bahamas, each with specific specialities, across several countries (including four tax havens).  The carousel appeared to be working smoothly until a single broker, Italian Alessandro Corridori, manipulated Fabricato repo transactions and caused the roof to cave in on the company.

A special agency has been set up by the Inspector General to oversee the criminal proceeding against senior Interbolsa figures. The crimes alleged include the misuse of funds, apparent laundering and unauthorized operations, and the agency will ensure due process and the rights of victims and other parties.

Meanwhile, the inquest has begun over the government’s apparent failure to regulate the actions of Interbolsa over recent years protect against the firm´s collapse.

Former Finance Minister Juan Carlos Echeverry, has moved to defend his actions against the accusations made by Liberal Party Leader, Simon Gaviria that he failed in his duty to regulate Interbolsa due to his former role as a board member of the firm (prior to taking office).

Echeverry claimed that he obtained a ministerial waiver so as not to deal with anything relating to Interbolsa for fear of conflict of interest. Speaking to the Financial Times’ blog beyondbrics, he claimed that he was “legally unable to act on regulatory and supervisory actions related to Interbolsa”, and as such the Minister for Trade and the Minister for Mining acted on his behalf.

In  further development this week in the on-going drama around the firm, shareholders in Interbolsa SA elected to fire Chief Executive Officer Rodrigo Jaramillo and Chief Financial Officer Jorge Arabia on Friday.

Category: Economy, News overviews
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Colombian economy healthy in 2013

The Colombian economy looks set for another year of healthy growth according to economic indicators from established forecasters.  Ernst and Young’s Rapid-Growth Markets Forecast for Autumn 2012 estimates that Colombia’s GDP will grow by 4.4% in 2013, a figure not dissimilar to the Colombian Ministry of Finance’s own forecast of 4.8%.

The Ernst and Young report notes though that the Colombian economy’s growth has slowed somewhat since 2011 when it grew by 5.9%. It attributes this to a fall in global demand, in particular in the key markets of the US and Europe where economic woes continue and in India and China where growth has decelerated.

It estimates this slight slow-down in Colombia’s economic growth will continue over the next four years due to the difficult global economic times, however the growth rate will not fall below 4%, making Colombia’s outlook much more positive than many developed countries.

Colombia’s national debt as a percentage of GDP is also the envy of the ailing economies of the West. At just under 15%, it gives the country plenty of leverage in its fiscal and monetary policy, a marked contrast to the US and the UK where respective national debt as a percentage of GDP figures of around 100% and 80% are imposing fiscal austerity.

One area in which Colombia has significant room for improvement according to the report is infrastructure, which it claimed was a significant factor in hindering Colombia’s ability to fulfil its potential in taking advantage of the global commodity boom in recent years. Indeed, this was reinforced by economic research institute Fedesarrallo, which recently ranked Colombia’s infrastructure as among the worst in the world.

The country’s size and three mountain ranges that run from north to south, coupled with the political instability of the armed conflict in the country has resulted in a neglect of Colombia’s infrastructure in the past 20 years, where road and rail links between its major economic centres are of a poor standard and flying is the preferred method of transport.

However, the improved political stability that Colombia is currently enjoying has resulted in the government making marked improvements in this area, for example through projects like the four lane highway to Colombia’s Pacific port city of Buenaventura.

Category: Economy, News Review
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Colombia´s unemployment – education reform required

Colombia and Latin America’s steady economic growth seen in the past year has been put in a new, less favourable, light by November´s The Hays Global Skills Index.

This index produced by a leading global recruiter, Hays and Oxford Economics, showed that despite Latin America’s expansion, the limited amount of professionals in the region poses a challenge for the future development of certain markets, offering a reason for the high unemployment rate.

Though the Hays Global Index does not fully explain the factors behind Colombia’s official 9.9% unemployment rate,  it does shed light on areas that could improve the country´s economic development.

The study claims the most sought after professions are those in the areas of natural resources, engineering, life sciences, retail trade, and finance, with the academics indicating a need for Colombia to refocus its education system to promote learning in these areas.

President Santos professes to have placed education at the heart of his government´s programme, citing it as a key driver of upward mobility, helping to combating inequality, and secure the Prosperity for All mantra of his administration.

The resources for financing the growing demand for tertiary education are still in question, and the disparity between the rhetoric and the reality is perhaps best represented by the current lobbying of the Federación Nacional de Representantes Estudiantiles de Educación Superior (Fenares), the National Federation of Higher Education Student Representative, in order to negotiate a bigger dispensable budget for public higher education.

The challenge for the government is not only to reassess the educational system to better prepare students for these areas of study, but also how it can ensure tertiary education is available to students of all socioeconomic levels.

Help has come in the form of a $46 million USD Inter-American Development Bank loan which Colombia’s Education Ministry is using to reduce territorial inequities, and to provide the necessary tools for educational institutions to create learning environments that strengthen socio-emotional qualities.

The 2008 World Economic Forum on Latin America identified the “need to construct values and skills-driven education systems as the top priority for Latin America to achieve sustainable development”; this remains very much a work in progress.

A decade long study of Colombian education by the World Bank found that a potential solution to the limited availability of the educational system would be to increase loan availability to students through a system similar to that of Sallie Mae in the United States.

For Colombia, the road to continual economic growth, means creating the proper incentives for both businesses and students to fill the skills gap. The country must also work to prevent pull the brake on the brain drain caused by reduced employment opportunities, and low remuneration.

The underlying reasons for Colombia´s high unemployment level requires exploration and long-term solutions: the country´s hiring process is often characterized by discriminatory practices, linked directly to the inequality inherent in both the educational system and the geographically differing rates of economic development.

Category: Comment, Economy
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Pacific Alliance: 90% of goods tariff-free by 2013

President Sebastián Piñera of Chile yesterday set an ambitious target of 90% of goods to be tariff free between the countries of the Pacific Alliance, which includes Colombia, by early 2013.

The organization´s founding members are Colombia, Peru, Mexico and Chile but it was also revealed this weekend Costa Rica and Panama are to join the club.

Speaking at the Ibero-Latin American Conference in the Spanish city of Cadiz where the Alliance´s member heads of state were congregated, President Piñera stated:

“We have taken steps to create wider and deeper integration for this area, which seeks not only the free movement of goods but also of services, investment and people. It also seeks coordination between our countries on policies towards the rest of the world, especially with Asia-Pacific.”

President Piñera also wished Colombian President Juan Manual Santos, well as next year he assumes the alliance´s rotating leadership.

The Santos Government has placed economic cooperation with both its neighbours and its key export markets at the heart of its political programme. Successes are notable with the free trade agreement between Colombia and the US finally implemented earlier this year, and the news this week that the free trade agreement with the European Union is to be signed in December.

The Pacific Alliance allows Colombia to broaden its horizons by promoting trade agreements with countries in the currently prospering Asia-Pacific region.

The Pacific Alliance is just one of the patchwork of trading blocs and organizations aimed at regional integration in Latin America, which include MERCOSUR, and CAN. The existence of multitudinous groups reflects the shifting alliances and often fractious relations between the countries in the region.

Established formally in July of this year, the first aim of the Pacific Alliance was to drop visa requirements for citizens of the member states travelling among the countries of the block for short periods of time, an aim fulfilled earlier this month.

However, doubts remain about whether the group will be able to fulfil its goals of deeper integration without formal institutions, legal structures and a defined timetable. What is more, with some of the member states having overlapping memberships of the CAN, the relationship between the two blocs could complicate matters further.

Category: Economy
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Colombia´s Interbolsa executives to face prosecution?

Executives at Colombia´s top brokers Interbolsa face possible criminal charges as the fallout from the firm´s dramatic collapse last week continues.

Finance Minister Mauricio Cardenas has ordered an inquest into whether the company evaded US$50m in taxes in its dealings with a capital fund in the Caribbean offshore haven of Curacao.

Director of Colombia’s tax agency, Juan Ricardo Ortega, said that such  “worrying behaviour”  is now  “subject to investigation”.

Moreover, Attorney General Eduardo Montealegre, announced on Wednesday that a criminal investigation into the events leading to Interbolsa´s sudden fall from grace will begin immediately.

The AG will look at four cases of potential criminal wrong-doing: A dereliction of the brokers´ duty to inform investors of the firm´s troubles, violation of conflict of interest rules, manipulation of share prices, and suspect practices surrounding corporate buy-outs.

On Tuesday, Simon Gaviria, Leader of the Liberal Party, and President of the Colombian House of Representatives, added fuel to the fire claiming execs´ “unmonitored” behaviour was on the border line of illegality.

Interbolsa´s liquidation will take around four months to complete while the extent of the firm´s losses remains unknown.

The 18,000 Investors whose frozen assets total around US$3.59bn, will, from next Monday, begin to see their money returned according to remarks made today by the settlement agent.

Market activity since last week´s collapse has been restrained as traders remain on alert for any signs of spillover to other financial institutions. Though the early signs are that this is an isolated case, the value of the Colombian peso has fallen in the past week by 0.1%.

Speaking to Bloomberg, an analyst at Banco de Bogota claimed that some were “seeking refuge” by buying up dollars, with this and the low trading volume suggesting nervousness among investors. Despite this, the bank also claimed that the “government´s actions have helped calm fears”.

The Colombian government, appearing to have learnt from the mistakes of the US financial crisis in 2008, acted swiftly to prevent a Lehman Brothers-style contagion.

Doubts remain, however, about the robustness of a regulatory framework that allowed Interbolsa´s traders to drive the company to the wall.

Category: Economy, News Review