Political polarization in Colombia is already making noise in the economy

Despite having signed a peace agreement, the country remains divided politically and socially

When the head of the Central Bank of Colombia was asked what kept him awake at night, his response unleashed the government's anger and provoked a debate between economists and businessmen.

Leer en español: Polarización política en Colombia ya empieza a hacer ruido en la economía

Juan José Echavarría admitted in the quarterly report on the performance of the fourth economy of Latin America, in May, that his main concern was the political polarization that the nation is experiencing and its effect on consumption.

"Political polarization is not good for the country's growth, consumers are scared, investors are scared," he said.

Shortly thereafter, the finance minister, Alberto Carrasquilla, replied in a bankers' forum that central bank officials should keep their opinions private and focus their comments on monetary policy.

The central banker's remarks led to weeks of challenging exchanges of words with the conservative government, including President Ivan Duque himself and raised questions about the sustainability of the Colombian asset boom and prospects for long-term economic growth.

Echavarría added fuel to the fire when he later said that investment and activity "stagnated" in the first quarter.

The Colombian economy expanded 2.8% annually between January and March, a figure lower than expected but higher than the average for the region, Carrasquilla said.

But if compared to the previous quarter, the Gross Domestic Product decreased by 0.01%. In addition, consumer confidence remains in negative territory and urban unemployment rebounded to 11.2% in May, a behavior that analysts and authorities still do not have a precise explanation.

"The part of polarization, that is absolutely ethereal, is a concept that has no basis in a concrete, empirical, measurable estimate and therefore are philosophical opinions," said Carrasquilla, who also chairs the board of the issuing bank, also integrated by Echavarría.

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Despite having signed a peace agreement in 2016 that demobilized the Revolutionary Armed Forces of Colombia (FARC), the country remains divided politically and socially.

The rejection of many in the conservative Colombian society to integrate former guerrilla fighters without paying for their crimes, added to the delay in the implementation of parts of the agreement and the killings of ex-rebels and activists, have even led many ex-guerrillas to return to the illegality.

Duque and his Democratic Center party, do not see with good eyes the agreement and one of his campaign promises was to make changes to toughen the pact. However, most of the other political affiliations in Congress support the agreement, whereby some 13,000 guerrillas surrendered their weapons.

This divergence in the legislative on the peace agreement has also generated crashes in other projects. A development plan and a tax reform promoted by Duque, for example, were approved but with important modifications that according to the rating agencies will force Colombia to seek more resources to cover their needs.

Blow to the real economy

Beyond economic growth at the annual level, there are other reasons to view with optimism the financial reality of the country: inflation is moderate with 3.3% annual rate in May, the peso has strengthened 4.5% in June and the Colombian Stock Exchange has risen almost 20% cent so far in 2019.

"I respect the Central Bank, I respect its independence, but I also believe that we all have to be rigorous and clear in these figures," said President Duque, whose approval ratings in his first year are among the lowest for a president.

But business leaders agree that political polarization is making noise on the consumer.

"When the environment is so convulsed and when we stay at the juncture of the day, we get distracted from the focus and that generates mistrust," said David Bojanini, president of GrupoSURA, the country's largest investment holding company.

"People ask if with so much agitate it is worth making an investment and (…) that stagnates the economy," he added.

Renzo Merino, deputy vice president, and sovereign risk analyst at Moody's admitted that political noise in Colombia can cause difficulties in the confidence and reforms that the country must do to improve its fiscal situation.

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"We have seen that some of the measures that were finally adopted in Congress may have diminished a little the effectiveness of the original proposals of the government," he recalled.

The country suffers a deterioration in the credibility of its fiscal outlook and the economy probably will not grow what the government expects, opined the director of sovereign ratings of Fitch for Latin America, Richard Francis.

"If the deterioration of credibility continues, we could lower the rating one step," he warned.

In May the agency had already reduced the credit outlook to negative from stable and kept the sovereign note at "BBB".

For the experts, the big impact would be on the Colombian economic activity, rather than on the markets.

"The risk (…) is that people postpone investments of GDP, not of the portfolio, but beyond that the real investment decisions of the economy," said Sergio Olarte, chief economist for Colombia at Scotiabank. "And that in the future can be more complicated."

Reuters | Nelson Bocanegra

Translated from "Polarización política en Colombia ya empieza a hacer ruido en la economía"