Colombia: El Subrpimo

The credit crisis tore into Colombia, casting a dark cloud over the economy. In contrast to its regional brethren, who benefited from the commodity bonanza, Colombia took advantage of the high levels of international liquidity to finance a security-propelled consumer boom. The perception of greater public safety and better leadership imbued Colombians with the sense of confidence needed to embark on an unprecedented spending spree. Years of cowering in fear of terrorist attacks and kidnappings were replaced with reckless abandon. New automobiles choke the thoroughfares of Bogota, Cali and Medellin. Plasma televisions adorn homes, and international vacations are de rigueur for most members of the middle class. High levels of foreign investment, thanks to privatizations, bond issues and IPOs boosted the level of international reserves to an impressive $24 billion. However, the country has one of the worst current account deficits in the region--an alarming 3.5% of GDP. This means that Colombia would be extremely vulnerable whenever the credit crunch hit, and now it is manifesting itself in the oddest of places.

The fiscal accounts are one of the areas which are showing the first signs of stress. We were always critical about President Alvaro Uribe's failure to honor his presidential campaign promises to push through the much-needed fiscal reforms. Instead, he used his political clout to ram through constitutional amendments to remain in office. However, the transfers to the municipalities and the privileged pension obligations were constant drains on the fiscal accounts. The problems went unnoticed for the past few years, as the level of economic activity surged. Unfortunately, they are resurfacing as demand eases and tax receipts decline. Colombia's GDP growth rate in 2008 will be less than half of what was posted in 2007, and it will be less than 2.5% y/y in 2009. This is putting a great deal of strain on the fiscal accounts, and local analysts expect next year's shortfall to rise above 3.5% of GDP. Government commitments to modernize infrastructure through the construction of new public transportation systems, highways and tunnels are making matters worse. The market is not taking the news in stride, sending financial asset prices lower. The Colombian peso lost half of its value before stabilizing. However, things will probably get worse before they get better. Venezuela and the U.S. account for more than 55% of Colombia's exports, and both countries are headed for sharp economic slowdowns. Moreover, a devaluation of the Venezuelan bolivar is somewhere on the horizon. Therefore, Colombia will probably face more pressure on its external accounts.

To make matters worse, Colombia is facing its own indigenous version of the subprime crisis. A wave of pyramid schemes spread across the country during the past few years. The schemes, which regularly advertized on television and were registered with local chambers of commerce, promised to double investors' money within six months. The pyramids were highly successful as Colombia's pace of economic activity surged and remittances increased. However, the slowdown in GDP growth and lower remittances brought the pyramids crashing down. The operators absconded with hundreds of millions of dollars, while the authorities claimed that they were completely unaware of their whereabouts. Senior government officials, including the President and Vice President, immediately washed their hands of the whole affair, stating that it was obvious that the schemes were nothing more than scams. However, they never had any such reservations when the operators were registering their companies or seeking active publicity. Thousands of Colombians took to the streets, and there were riots in some municipalities, such as Popayan. Although the Colombian pyramid scheme lacks the sophistication of the U.S.subprime fiasco, the end result was the same. Investors were fleeced, while the authorities stood idly by. Hence, in one way or another, the international credit crisis is laying siege to Colombia.

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