Economy & Finance 16
In contrast to some wildly unsustainable economic schemes proposed by incoming Colombia President Gustavo Petro – like giving dead-end government jobs to 3 million unemployed people -- outgoing President Ivan Duque on July 21 here in Medellin outlined huge potential for sustainable jobs growth and wealth creation in the creative-industries sectors, also known as the “orange economy.”
Thanks to wisely targeted tax incentives, “today Colombia is the epicenter and the most attractive place in Latin America for more investment in the orange economy,” President Duque explained here.
At the “Forum of Art, Culture, Creativity and Technology,” Duque pointed out that companies in the creative-industries sectors here "do not pay income tax during the first five years,” as long as they meet certain targets for investment and jobs creation.
“Last year more than 300,000 companies were created and, according to Confecamaras, 40% of them were associated with the orange economy,” he said.
Colombia’s national trade-school program (SENA) “has more than 400,000 young people who have been trained through these certified programs, and SENA can reach an additional million in complementary programs,” he added.
“Today Colombia allows these enterprises to connect with more markets, with important regulations that allow more exports from Colombia, including creative services, and at a 40% tax discount,” he said.
Thanks to huge growth in the “orange economy,” creative industries here now account for a greater proportion of Gross Domestic Product (GDP) than even Colombia’s traditional coffee and mining industries, he said.
That’s why “we have to ensure that this sector has a continuing voice, stability, training and projection for the future,” he concluded.
A new report just issued by Medellin-based retail trade group Fenalco Antioquia finds that Colombians working abroad -- mainly in the U.S. and Europe -- sent a record US$1.52 billion back to their families here during 2021, boosting the post-Covid-pandemic economic recovery.
Citing statistics from Colombia’s Banco de la Republica, Fenalco found that Antioquians here not only received a record-setting US$1.52 billion in “remesas” (foreign transfers from family members abroad) for the entire year 2021, but that fourth quarter (4Q) 2021 remittances hit a new quarterly high of US$412.8 million, up 26% year-on-year.
“The record in remittances is explained by the global economic recovery,” according to Fenalco.
Not only did Medellin and Antioquia benefit from these foreign transfers, but Colombian families nationwide netted a record US$8.6 billion in total remittances last year, according to the report.
The largest beneficiaries were the departments of Valle del Cauca (first), Antioquia (second) and Cundinamarca (third), accounting for 61% of total national remittances, or US$5.26 billion.
In Colombian peso terms, the value of those dollar remittances to Antioquian families alone topped COP$5.68 trillion, the study shows – a big boost to the local economy.
The International Monetary Fund (IMF) on May 2 unveiled a new report finding that the Colombian government continues to exercise sound economic, social and fiscal policies – even in the face of the Covid-19 pandemic, its unavoidable economic consequences, massive influx of millions of desperate Venezuelans -- but facing potential reversals from upcoming elections.
Assuming Colombia won’t suffer a dramatic political-economic reversal and would continue with its capitalist social democracy, the IMF just approved “a successor two-year arrangement for Colombia under the Flexible Credit Line (FCL), designed for crisis prevention, of about US$9.8 billion,” according to IMF, the global economic stabilizer for its 190 member nations.
“Colombia qualifies for the FCL by virtue of its very strong economic fundamentals and institutional policy frameworks and track record of implementing very strong policies and commitment to maintaining such policies,” according to IMF.
“Prior to the pandemic in 2020, Colombia had been on a path of gradually reducing access under its FCL arrangements, and the new arrangement resumes this path. The arrangement should boost market confidence, and combined with the comfortable level of international reserves, provide insurance against external downside risks.”
“Colombia has very strong economic fundamentals and policy frameworks anchored by a credible inflation targeting-regime, a solid medium-term fiscal framework, a flexible exchange rate, and effective financial sector supervision and regulation,” added IMF Deputy Managing Director Antoinette Sayeh.
“The authorities remain firmly committed to maintaining very strong macroeconomic policies going forward. There is also broad consensus in Colombia on the importance of preserving very strong policy frameworks.
“Colombia also has a very strong track record of macroeconomic management, which allowed the authorities to deliver a comprehensive response to the pandemic, promote a steadfast economic recovery, continue to integrate Venezuelan migrants into Colombian society, and support rising living standards.
“With a robust recovery underway but risks tilted to the downside, Colombia has taken steps to normalize policies from a crisis footing and manage higher inflation, while strengthening public finances and reducing external imbalances.
“Meanwhile, international reserves remain adequate. The structural reform agenda rightly aims at fostering inclusive and sustainable growth and enhancing external competitiveness,” Saveh concluded.
Among the IMF report highlights:
-- “Colombia’s strong economic recovery in 2021 places it among the region’s growth leaders. GDP growth for 2021 was 10.6%, on par with Chile and Peru as the fastest growing economies in the region. Buoyed by pent-up household consumption and higher credit growth, GDP growth is forecast at 5.8% in 2022 and 3.6% in 2023,” according to the report.
-- “Inflation has been well above the central bank’s target of 3% since August 2021, prompting the central bank to raise rates and to accelerate the pace of tightening. Amid strong domestic demand, supply-side constraints, and sharply rising commodity prices, inflation climbed to 8.5% in March, well above the central bank’s target.
“As supply constraints and commodity price pressures are alleviated, staff expects inflation to gradually return to the central bank’s target by mid-2024, although inflation risks are to the upside.
-- “Alongside the recovery, Colombia’s public finances are showing signs of improving with scope to make further gains. The fiscal deficit was smaller than expected in 2021. With stronger growth and broadly unchanged spending, the central government fiscal deficit was 8.2% of GDP in 2021, about 1.5% of GDP lower than in the 2021 Medium-Term Fiscal framework target.
“A lower fiscal deficit (6.1% of GDP) than what is required to comply with the new fiscal rule (7.9% of GDP) appears within reach this year, given higher tax collections due to the stronger-than-expected economic recovery and restraint on primary expenditures.
-- “The current account deficit widened further alongside demand-led growth. Alongside strong domestic absorption and higher import prices, the current account deficit widened noticeably from 3.4% in 2020 to 5.7% of GDP in 2021 . . . assessed as being temporary due to pandemic-related effects and domestic disruptions to oil production.
“FDI [foreign direct investment] has remained a strong and stable source of financing, while portfolio inflows were positive in 2021 but decelerated as investors adjusted their positions due to Colombia’s sovereign ratings downgrade.
--“ Colombia’s banks have withstood the pandemic well and the financial system remains sound. Credit growth, particularly consumer loans, appears to be entering an upswing amid a stronger growth outlook. Businesses and households improved their balance sheets, but leverage ratios remain elevated, particularly for non-financial firms. Banks exhibit strong capital and liquidity buffers, underpinned by effective supervision.”
--"While Colombia’s balance of payments and fiscal position stand to benefit from higher hydrocarbon prices, rising and volatile international prices for food and energy, as well as more persistent disruptions in global supply chains would exacerbate domestic inflationary pressures.
--"Notwithstanding the recent slowdown in migrant flows, higher-than-expected migration flows from Venezuela would raise near-term fiscal and external deficits. These shocks could heighten Colombia’s fiscal risks and are likely to be exacerbated by political uncertainty from the upcoming national election cycle,” the report adds.
The Medellin Mayor’s Office revealed May 4 that to date, 64,366 companies have registered under the pioneering “Medellin Me Cuida” economic restart program for manufacturing and construction sectors here.
According to the Mayor, of those 64,366 companies, 54,810 have presented evidence of compliance with new biosafety protocols to prevent the spread of Coronavirus. So far, 33,702 companies have been certified in compliance, while another 8,915 are pending approval.
As a result of the “Medellin Me Cuida” registration and biosafety compliance programs, 785,260 employees are now authorized to venture out to and from work in the Medellin metro area (Valle de Aburra), including 528,695 inside Medellin itself, according to the Mayor.
“The Municipal administration will follow up on the biosafety protocols that were approved for the companies,” the Mayor added.
Authorization notices were sent by email to authorized companies, including text messages to those accredited to work.
“In Medellín we are pioneers [in company/worker registrations] because we not only require biosafety protocol from construction or manufacturing companies, but also from those that were already exempt in previous [Coronavirus quarantine-exemption] decrees,” added Medellin’s general secretary Esteban Restrepo Taborda.
“The municipalities of the metropolitan area were in charge of approving the companies domiciled in each locality, then linking the required information on the [Medellin Me Cuida] platforms and thus allowing the movement of workers anywhere in the region,” according to the Mayor’s Office.
To qualify for quarantine exemption, employers must enforce biosafety protocols such as the mandatory use of a face mask, minimum distancing of employees and the provision of elements for worker care such as glycerinated alcohol plus policies for self-care and isolation (such as telecommuting for office workers).
“The Mayor’s Office of Medellín, together with the authorities, will continue to adopt control and surveillance mechanisms to comply with protocols to preserve the life of citizens and also reactivate the economy for the well-being of all,” the Mayor added.
The Medellin Chamber of Commerce for Antioquia (CCMA) just revealed a new study indicating that the Coronavirus quarantine costs the local economy here at least COP$170 billion (US$42 million) every day -- and 95% of businesses have seen sales drop anywhere from 80% 100% during the crisis.
As a result, Antioquia regional gross domestic product (“PIB” in Spanish initials) likely will come in at a net-negative 1.5% to 2% this year -- barring some dramatic reversal, according to CCMA.
To get an idea of this impact, Antioquia’s GDP in December 2019 alone was COP$134 trillion (US$33 billion), according to CCMA.
“Of the 3 million employed persons in Antioquia department, close to 1 million work in activities at high risk of Covid-19, and losses of between 112,000 and 131,000 jobs are projected, which implies an increase in the unemployment rate close to 15%,” according to the trade group.
Because of quarantine rules to date, “55% of the companies in Antioquia are not currently operating. These represent 41.2% of formal jobs,” according to CCMA.
The controlled reopening of construction and manufacturing sectors on April 27 will help industry and employment -- but won’t solve all the current problems, the group added.
What’s more, 88% of companies only have enough cash-on-hand to survive a maximum of one to two months, CCMA’s survey found.
Meanwhile, ANDI – Colombia’s biggest national industrial/commercial trade association – on April 23 released findings of its second survey on cash liquidity among 238 member companies.
“Compared to the results of the previous survey, it can be seen that the liquidity situation of companies today with updated information as of April is more critical to the extent that the vast majority of companies have not received income and have had to continue to cover their expenses,” according to ANDI.
“In effect, with updated information, companies only have 11 days to operate if they allocate the entire cash flow of the company to fulfill all their obligations -- that is, the entire payroll including social security, suppliers, financial sector, contracts and Dian [taxes].
“In the case of manufacturing companies, they have 12 days to operate” if cash-on-hand were disbursed to cover all outstanding expenses, ANDI found.
“In the manufacturing industry, there is an average of 42 days in cash to cover the salary of employees, 31 days to meet the full payroll including social security payments, 15 days to pay suppliers, 38 days to cover fixed expenses associated with contracts and loans acquired with the financial sector, 43 days for the payment of withholding tax and 42 days for the payment of VAT [value-added tax] withholding.
“However, the situation is much more complex for a large number of companies: 38.7% of the companies surveyed only have sufficient cash to cover between one and eight days if they meet all their obligations of payroll, suppliers, fixed expenses, financial sector and Dian, while 17.1% only have between nine and 15 days left, while 27. 6% have between 16 and 30 days. Thus, 83.4% have cash to operate for a month or less.”
