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Analysis and opinion 20 Apr 2016

Colombia’s opportunities in the new environment

Falling oil prices are pushing Colombia into a new reality. It is a reality that implies cuts in private and public spending and therefore also in short and medium term growth. This new reality can be seen through two different perspectives: the pessimistic view that relives the glory days of the past with oil prices around $100 per barrel and the optimistic view that shows us the opportunity to strengthen, find and build sources of growth for the near future. As I tend to be more of an optimist, I think that we stand before an opportunity.

For example, we have the opportunity to take advantage of the new exchange rate and the adjustments Colombian consumers are making by offering agro-industrial and industrial products that take the place of imports. We can also carve out a path abroad for our exports. We are already doing this at least partially.

Local industry and agro-industry have demonstrated that they have the ability to react and they have. Colombia has a good industrial base and the challenge is to find out what each industrial sector can do best in the new environment. Another clear example is agricultural production, which has enormous potential to increase productivity and diversification. Rural Colombia has been forgotten in recent years but the decreased intensity of the conflict over the last few months (thanks to the peace negotiations in Havana) is a key element of this process. Retail, hotel and restaurant sectors are also on the radar and both local and international consumers are becoming familiar with different aspects of the country.

“Colombia has a good industrial base and the challenge is to find out what each industrial sector can do best in the new environment

From this same perspective, we cannot forget that these periods of change are an opportunity to assess pending structural reforms that would stimulate growth. In particular, the discussions that began more than a year ago on tax issues should be finalized. The current tax regime does not help to improve equality, foment investment or collect sufficiently. Despite recent reforms, local and international production and distribution costs still have room for improvement.

Fourth generation construction projects

Fourth-generation infrastructure construction projects are underway and five years from now will drastically improve the country’s connectivity. Additional effort is needed to review production costs, such as energy and logistics costs, as well as extra payroll costs that are not conducive to formal labor contracts. In terms of health, the enormous accomplishments in coverage in recent years should be accompanied by reforms that ensure the financial sustainability of a country with a large informal sector and little incentive to contribute to the system.

Colombia is taking advantage of this juncture and its performance in the near future will depend on its ability to make these opportunities a reality and swiftly implement the necessary reforms.  

Juana Téllez is chief economist at BBVA Research Colombia.

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