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COLOMBIA: An Introduction

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The Colombian economy grew 3.3% in 2019, in comparison with 2.6% growth in 2018. Although it was not the growth the National Government had wanted, it stands out amongst other countries in the region and is within the expected levels. It shows, in general terms, that the Colombian economy is reactivating. Internal demand (4.3%), private consumption (4.5%) and investment (4%) were contributing aspects of this positive performance.

Other elements that favoured the growth dynamics, which are generated from regulations and policies implemented by the Congress and National Government, were:

a. Changes made to tax regulation in 2018;
b. Government initiatives, such as the Finance Law, which promoted incentives for private investment, and thus, a boost in confidence for local and foreign investors;
c. Lower interest rates, which promoted credit growth and demand for credit, specifically credit destined to housing, which increased real estate property demand;
d. High migration influx, which raised the private consumption levels; and
e. The positive performance of public construction works and construction of social interest housing favoured by the central and local governments' public policies.

Notwithstanding the internal economic growth, foreign investment levels in Colombia were affected by a slower economic dynamism on a global level and of the country’s most important partners. This impacted local markets that are closely tied to the foreign markets, such as the agricultural and industrial sectors, which suffered decelerations in 2019 when compared to 2018. Colombian economic growth was also affected by unemployment levels, which closed at a higher rate than previous periods.

In connection with business, we saw a growth of merger and acquisition transactions involving Colombian parties. Per various sources, mergers and acquisitions in Colombia during 2019 amounted to over USD 12,300 million, with a total of 239 registered deals. In comparison to 2018, this represents a growth of 178% (in terms of value). The transaction of greatest relevance, according to value and participants, relates to the Public Acquisition Offer by Grupo Pão de Açúcar, through its subsidiary Sendas Distribuidora, of Grupo Éxito. The total amount of the transaction was USD 2,218.89 million.

The above is the result of not only the traction and attractiveness of the Colombian economy within the region, but the reduction of restrictions to direct foreign investment, which in 2019 were at their lowest in the country’s history. Direct foreign investment in Colombia in 2019 was valued at USD 11,444 million, which represents a 19.2% growth in comparison to 2018 (USD 8,679.2 million), per data from the World Bank’s Business Report 2019-2020.

Public finances were maintained on a moderate, responsible level due to the tax authority's work and Ecopetrol's positive performance. These factors contributed to the leverage of the country’s finances, and avoided a greater deficit, which would have affected the investment rating.

With respect to 2020, it is expected that the Colombian economy will grow at a similar rate to that of 2019. Between January and February, the Colombian economy had a 4.1% growth. Sectors with the best performances were agriculture, pisciculture, livestock, mining, transport, manufacturing, public services and tourism, which had a performance of over 2.48%.

However, due to the global economic recession, it is expected that private consumption and investment (both contributors to the 2019 economy growth) will be affected. Now, the depth and duration of the contraction will be directly related with the development of the COVID-19 pandemic, the public heath service's capacity to face the situation and how this is reflected in the global economy.

The contraction of the Colombian economy has been induced by the measures adopted by the National Government to mitigate the COVID-19 outbreak, such as the preventive lockdown, which together with the global uncertainty and the drop of oil prices, led to correct the economic growth outlook for the country to 3.7% from 5.5%.

In line with the contraction of the gross domestic product, it is also expected that inflation will be below 2.5% as a result of reduced internal demand, a consequence of the limited household consumption capacity. Household consumption will be reduced by 5.7%, while investments, being more volatile, will drop to 17.7%. On the other hand, the Government’s expenses will register a variation of 4.1% which represents 0.66pp over the amount registered during 2019.

In the context of global uncertainty, global supply and demand will also drop in a considerable manner, creating a relevant reduction in international commerce, which will affect the Colombian import and export industries.

Note that in December 2019, the Congress sanctioned the Growth Law with the intent to create a stimulus and incentive for investment. This law collects a number of policies related to the creation of a simplified tax regime, the progressive reduction of income tax rates for companies and measures to promote investment in the Orange Economy, among other incentives.

The latter, together with the fiscal benefits and stimulus promoted by the National Government to face the COVID-19 outbreak, are expected to mitigate the impact of the economic recession in 2020 and the consequences that the contraction may bring to companies and workers, as well as to create an optimal landscape for an accelerated reactivation thereafter. The stimulus promoted by the National Government includes additional resources for the health system, special credit lines for companies in certain sectors and the postponement of due dates for tax collection in other sectors.

In any case, the behaviour of the economy will mainly depend on the moment at which it becomes possible to control the pandemic and the way in which policy makers face the situation. Assuming that it is possible to overcome the COVID-19 spread in 2020, the internal gross product growth for 2021 could be 6.6%, driven by the reactivation of consumption and economic activity generally.