“I WAS here ten years ago when the economy was in crisis and every day’s news was worse than the day before. Now all the news is better than expected.” Juan Carlos Echeverry was a top official in Colombia’s finance ministry when the country, then violence-ridden, went through a messy mortgage bust and budget crunch in the late 1990s. Now, as finance minister, he is in charge of an economy on the rise.
Foreign investment is up, drawn by an improved security situation, the lure of minerals and a bouncy regional market. Public coffers are swelling, thanks to rising commodity prices and oil output. Standard & Poor’s hiked Colombia’s sovereign-debt rating to investment grade last month.
It is Mr Echeverry’s task to manage the consequences of this good news. High oil prices could encourage outsize demands for government spending. A flood of foreign capital could send the peso soaring and cause credit bubbles, while threatening the viability of industries from cut flowers to food processing. The decision to create an integrated regional bourse with Peru and Chile will attract more money.
Colombia is not the only emerging economy to face these issues. Countries from Brazil to South Korea have introduced a plethora of taxes and restrictions to deter foreign inflows. But Colombia is one to watch. Along with Chile, it pioneered the use of capital-inflow controls in the 1990s. Yet its strategy today is subtly different from many others, with more weight on fiscal reforms and less on controls.
The country’s technocrats do worry about the impact of inflows but they see the exchange rate as the most important shock absorber. And with Colombia’s long-term prospects improving, they believe a gradually stronger currency is inevitable. José Darío Uribe, governor of the central bank, puts a lot of weight on using prudential rules to stop inflows causing financial instability. The central bank does not allow banks to borrow in foreign currency and then lend in pesos, for instance. It guards against maturity mismatches in foreign currency and it has long limited banks’ foreign-exchange derivative bets.
Mr Uribe is less convinced that capital controls can do much to affect the exchange rate. Though no one rules them out, such controls are clearly not Colombia’s first line of defence. And when the central bank does intervene to try to stem excessive strength in the peso, the tactics are different from, say, Brazil’s.
On September 15th 2010 the central bank announced that it would buy $20m of foreign exchange every day for four months. That policy has been extended to mid-June. Mr Uribe is convinced that this kind of transparent, small, predictable intervention is much more effective than the large-scale but unpredictable accumulation of foreign-exchange reserves that other emerging markets have gone for. Colombia’s currency has depreciated slightly over the past six months, in contrast to most others in the region (see chart). How much this owes to the intervention strategy is debatable. Roberto Steiner of Fedesarrollo, a think-tank, says the goal is to insulate the central bank from pressure to intervene more fiercely.
The big question is whether Colombia’s government will be able to resist political pressures to spend. The budget deficit is likely to be well over 3% of GDP in 2011. Colombia urgently needs better infrastructure. Despite the government’s military gains against the FARC guerrillas, plenty of money still needs to be spent on security and reparations. As Alejandro Gaviria at the Universidad de los Andes says: “Colombia faces the demands of conflict and post-conflict spending at the same time.” And painfully high income inequality means pressure for social spending, too.
Mr Echeverry is trying hard to hold firm. A recent tax reform slashed tax breaks on investment. A Chilean-style fiscal rule, designed to limit the deficit and force the prudent use of commodity receipts, is working its way through Congress. But in a country whose constitutional court can force public spending (by, say, declaring that people have a right to expensive health care), that may not be enough. So the government is also pushing for a German-style constitutional amendment to enshrine the notion of fiscal sustainability. Mr Echeverry is confident. “The whole economic plan of our government is tailor-made to manage a boom,” he boasts.
http://www.economist.com/node/18560513
No comments:
Post a Comment