The earthquake on August 10 completely changed the country’s priorities. Overnight, the incoming government’s work agenda was modified and its funding figures multiplied. Within hours, the new officials went from thinking about austerity and fiscal adjustment to calculating the millions needed to finance the care of victims and the subsequent reconstruction of lost homes.
Where will the money come from to address the emergency? What happens to the need for fiscal adjustment to restore macroeconomic sustainability? What will now happen to the opportunities identified for the private sector to take the lead in economic growth? These and other questions are addressed below by Armando Montenegro, former director of National Planning and currently chairman of the investment bank BTG Pactual, who leverages his public and private experience to dissect the current crisis and the paths to resolve it.
-How should economic policy respond to a catastrophe like the earthquake?
The economic response to the tragedy must take into account the country’s other very serious problems. The health system is falling apart, the electric sector has very serious issues, and the fiscal deficit is enormous. The earthquake changes priorities but cannot hide the other problems.
-Before the earthquake, we were committed to a fiscal adjustment of 60 or 70 trillion pesos. Now the direct costs of the earthquake are estimated at 30 trillion. What does that mean?
The fiscal deficit, according to the Minister of Finance, was 7.8 percent of GDP before the earthquake. Meanwhile, sectors like health and energy urgently need resources equivalent to about one percent of GDP. Thus, fiscal needs rise to 8.8 percent of GDP and, if the earthquake costs 1.5 percent of GDP, we are close to 10 percent of GDP. That is a huge deficit, probably unseen since the Thousand Days War, requiring urgent measures and great attention.
-The economic emergency declared by the Government seeks to cover the part related to the earthquake. But how is the rest managed?
Before the earthquake, the Government had announced a fiscal adjustment plan: tax reform, state reform, and spending cuts. To that must be added new fiscal measures and a reordering of royalties that could be much deeper than has been said. But Colombians are waiting for the Minister of Finance and the Government to give us a medium-term vision that clarifies, given a fiscal problem of nine or ten points of GDP, which measures will be adopted for the economic emergency and which to address the structural problem.
-Under these conditions, is it possible to do without a new tax reform?
I don’t think so. With the 2027 budget to be known in a few weeks, the Government must present a new ‘Medium-Term Fiscal Framework,’ with projections that tell us how it sees the fiscal situation at least until the end of this term. The Government had already announced the tax reform and it is inevitable. What can be discussed is whether it will be in two chapters: one part with the economic emergency through decrees and the other in bills to be discussed in Congress.
-And how are public finances stabilized with fiscal needs close to 10 percent of GDP?
The first thing is that a correction of that size is frankly impossible in the short term. I think the Government should present an adjustment plan of three or four points of GDP, that is, about 80 million over four years. This cannot happen overnight or from one year to the next, and must include spending cuts, elimination of some unnecessary functions, and duplications.
-The Government came to power with the purpose of reducing the size of the State and giving more room to the private sector. Now that the State must come to the rescue, is that model at risk?
No. The private sector must make a very important contribution in this situation. The country must resume oil production as Brazil and Argentina are doing. We cannot keep kicking the can down the road, nor keep chasing such an important fiscal source. The same with minerals. Now that minerals are needed worldwide for chips and new technologies, Colombia must develop mining ambitiously. These are projects where there will be private investment, both national and foreign. Also, there is the Orinoquia project, which can provide the country with a large amount of agricultural resources that we currently import.
-We have talked about mining, agroindustry, and agriculture. What other opportunities are there?
Construction is also very important because it is a sector that reacts very quickly with adjustments in subsidies, interest rates, and State support. Even rapid reconstruction, through credit instruments, can be a relatively quick and effective boost.
-Can the political temptations brought by welfare distract the Government from its original model of less public sector and more private sector?
I would hope not. There are two phases in emergency care. First is the welfare part: delivering food, water, and medicine. But then comes reconstruction, which requires management, engineering, and good resource handling. That does not yield as much political credit.
-The division of labor in the new government, with the technical part in Vice President Restrepo and the President doing more politics and presence, is a tandem that has worked so far. Can that tandem fragment over time?
Hopefully that formula remains strong, and the relationship between President De La Espriella and the Vice President solidifies. But we have to wait and see…
-You were director of the National Planning Department. Do you think a Planning Department makes sense in an economy like Colombia’s today?
I think so. Colombia needs people who look at what happens three, four, or more years ahead, like growth, energy transition, and climate change. It is very important for the country to have capable, experienced, and well-trained people in the Government thinking about that.
-And today does the National Planning Department respond to those needs?
It is undeniable that in recent years, National Planning has lost the prominence it had in other times, with very honorable exceptions. Hopefully, the person appointed to lead Planning surrounds themselves well and can restore the entity to the place it had before.
-And what do you think about the change of the Planning Director candidate to another director in 36 hours?
There is something I did not understand well: when the President announced the new director, he said he was appointing the head of an agency attached to the Ministry of Finance, and that is not so. The DNP is an administrative department that does not depend on the Ministry of Finance. So I don’t know if there is some institutional confusion about this.
-Could that mean that what Planning does is not well understood, or does it reveal a public policy desire?
I couldn’t say. We would have to ask the Government what it thinks about Planning’s role.
-Let’s talk about the puzzling drop the dollar has had. The fiscal problem has reached unprecedented dimensions and yet the dollar keeps falling. What is happening?
The country is going through a honeymoon with Abelardo De La Espriella’s government. Financial and capital markets are very optimistic. They have confidence that this government can fix fundamental problems, like fiscal and financial ones. With that confidence, conditions have been created for the stock market to rise, TES rates to fall, and naturally, the dollar value in Colombia to fall. The dollar’s behavior is based on two elements. The first is that the country risk has dropped more than 80 points since the first electoral round. There has been a perception that now the risk of investing in Colombia is much lower, which has brought a strong inflow of capital. An investor can borrow abroad at 6 or 7 percent, bring the money and invest in TES, which yield 12 percent. So people can earn 5 or 6 percent plus revaluation. It’s a great business. On the other hand, the Government has been bringing in dollars from external debt to finance the deficit and expenses it has to make. These two effects cause the dollar to appreciate. That is the honeymoon.
-What could be the factor that determines the end of the honeymoon and what kind of exchange rate equilibrium should it lead us to?
Above all, it must be taken into account that every honeymoon ends.
But the romance continues…
The romance continues and that means we will not enter a tragedy. But when some difficulties arise in Congress or El Niño worsens, the country risk may rise a bit. At BTG Pactual, we are thinking that towards the end of the year the dollar could be between 3,400 and 3,500 pesos, amid the uncertainty about these issues.
-There are labor-intensive export sectors that are struggling badly with a 29 percent increase in labor costs due to the minimum wage and reduced working hours, plus revaluation and tariffs in the United States. Should the Government do something or is it useless to try to change market forces?
Two measures are on the table. The Central Bank is buying dollars, and in some way, that constitutes an upward force that will surely have some effect later. And the President, wisely, is trying to build on the friendship and support of Donald Trump to get tariffs lowered. Additional policies with fiscal cost could be taken, but in this situation, I think it will be impossible for now. As long as this is temporary, we should not tear our hair out looking for long-term solutions. We believe this critical exchange situation will only last a few months.
-If you, as an investment banker, were to make a market report today with three points about the factors to consider to know where the Colombian economy is headed, what would they be?
First of all, we must expect a good adjustment, with a panoramic view of the fiscal situation and the measures the Government will take. I think that is fundamental. Second, we must thoroughly evaluate the Government’s plans to reactivate private investment. We have already talked about the opportunities in mining, oil, gas, agroindustry, and housing, and we must see what concrete measures are taken in those sectors.
And third, we must look at what the Government will do in the short term with the health and electric sectors. There are very serious ailments that must be addressed very quickly. Fortunately, we have two very capable ministers in Mines and Energy and in Health, and let’s trust they will stand up to the Government to remind it that, apart from the problems and the earthquake emergency, these sectors must be attended to very quickly.
MAURICIO REINA
Special for EL TIEMPO