Although growth rates of a forecast 6% this year look like slowing down over the next few years as interest rate hikes bite and the US economy faces a difficult period, most investors expect Colombia to reach investment grade by early 2009.
For a country that was wracked by violence and a difficult business atmosphere only six years ago, this represents a metamorphosis. The normality of it all was evident only a couple of months ago at the Union Club, located in one of Medellín’s glossy new shopping and business centres, where the annual meeting of the Medellín chapter of ANDI, the Colombian business association, was taking place.
There, a top official from the Banco de la República de Colombia, the central bank, spoke his piece about why worries about inflation – more than 5% when the central bank’s goal is between 3.5% and 4.5% – had led it to raise rates to 9.25%.
With but a hint of sarcasm, Luis Carlos Villegas, president of ANDI, responded by saying how much businessmen appreciated the conquest of inflation, but that a benchmark interest rate of 9.25% should be the ceiling.
“No more rises in interest rates. No more,” he intoned, no doubt thinking about the 12% appreciation of the Colombian peso in the year to date. He also called for the government to move quickly on privatising a couple of power companies – it has delayed and backtracked on this – in order to bring the deficit down and lower the state’s international funding needs, which are also responsible for the peso’s rise.
But as Andrés Restrepo, head of economic research at investment bank Corficolombiana, pointed out, the economy is doing well and that in itself makes it difficult for a government already in power for five years to deal with unpopular policies such as cutting spending or reforming taxes, both of which he believes are necessary.
Other business people also complain that the government is lagging on the economic reform front.
Andrés Felipe Arias, the youthful minister of agriculture and former head of macroeconomic policy at the Ministry of Economy, disputes the accusation. He argues that changes to bills on tax reform and transfers to the regions were not due to the government having to pay back political favours, but because of “the difference between the ideal world and the feasible one”.
He adds: “In Colombia there is no willingness for the sort of structural changes to tax reform [originally envisaged].”
Mr Arias also denies that deeply unpopular capital controls, imposed after the government had said it would not do so, have failed. He notes that the flower and coffee export industries, among others, are already paying the price of the peso’s rise. That is crucial in terms of social stability.
“We can’t risk losing jobs here as they are fuel for coca and terrorism,” he says, highlighting a major challenge for Mr Uribe’s government. Its undisputable achievement in reversing the dangerous security situation – combating guerrillas, drug lords and paramilitaries – is not enough. The fight is ongoing.
Mr Arias, a native of Medellín, has experienced it personally. When he was younger his family was forced to lock themselves into their house at night to hide from the killings on the streets.
That behaviour is no longer necessary in Colombia’s second largest city. Located between mountains, Medellín is the capital of Antioquia, the industrial heartland of Colombia. Antioquians take great pride in the turnaround. The watershed was the death of infamous Pablo Escobar, head of the Medellín cartel, followed by a series of good mayors and the Uribe government.
The mayors include charismatic Sergio Fajardo, whose term in office is coming to an end. The former maths teacher, interviewed in the back of his four-wheel drive as he was driven home along the city’s winding roads following a speech at the ANDI meeting, is credited with helping transform Medellín.
Formerly out-of-bounds neighbourhoods where daily gun battles took place have now been integrated into the city’s transport system and show a peaceful face to visitors. Mr Fajardo’s formula includes a heavy dose of social spending to tackle the poverty which helps engender violence – the region and the city’s coffers benefit from its wealth and a committed industrial class.
Asked whether he was going to run for president of Colombia and take over from Mr Uribe in a few years, 52-year-old Mr Fajardo, who ran for mayor as an independent, says: “Medellín is powerful and shows the path. Our formula is to reduce violence and immediately convert it into a social opportunity. What we need to do is examine the alternatives and what it could mean to translate this into a national path.”
“It is a possibility,” he finally admits.
Whether he or someone else wins the election due in a few years, Colombia is on the right path.
