Colombia Announces US$2.7bn Package to Stimulate Economic Growth

Colombia has launched an economic stimulus package aimed at curbing the rising value of its peso (COP) and stimulating growth in an economy that has slowed down in recent quarters.

Earlier this week, the Latin American country announced that it would spend COP 5 trillion or US$2.7bn on a package aimed at creating more than 300,000 new jobs and increase the gross domestic product (GDP) growth rate by 1% annually.

Dubbed the Promotion Plan for Productivity and Employment (PIPE), the initiative hits upon the five so-called ‘locomotives’ of the Colombian economy infrastructure: agriculture, mining, housing, construction and technological innovation, identified by president Juan Manuel Santos as drivers of economic growth.

Colombia’s economic growth slowed to 4% last year, from 6.6% a year earlier. The central bank expects the rate this year to be similar to 2012. However, Santos said the stimulus package would push growth higher to meet the government’s target of 4.8%.

“This is a well-designed plan, well targeted,” he announced at a news conference. “We’ve designed it with a lot of care so that it has an impact on productivity and the economy.”

Finance minister Mauricio Cardenas added that the package will be financed with funds from the 2013 and 2014 national budgets and will not threaten the government’s fiscal targets. He said that the appreciation of the COP is Colombia’s biggest economic challenge as a stronger currency erodes the revenues of exporters and causes problems for manufacturers who struggle to compete with cheaper imports.

US-friendly policy

The PIPE programme, which is being instigated in an election year for Santos, encourages private pension funds to invest more abroad and requires the state-run pension fund to keep its share of oil and mineral royalties overseas. The government hopes such measures will stem the appreciation of the currency.

“This is in stark contrast to what Argentina is doing,” said Andrea Keenan, vice president of research, ratings criteria and relations at ratings agency AM Best. “This will attract further investment in the country. People see Santos as business-friendly and open to further increases in international capital flows.

“Whereas Argentina is being xenophobic, Colombia is being innovative and taking a global, trade-friendly route. One of the indications of Santos’ global initiative is that he and the US recently enacted a free trade agreement. That opens all kinds of doors for trade.”

The United States-Colombia trade promotion agreement, a bilateral free trade agreement, has been in force since May 2012.

Much of the boost to the economy will result from planned infrastructure projects being brought forward, according to Julio Arciniegas, executive president of the risk advisory and insurance broking group Willis Colombia.

“The package includes some works that were going to be done in 2016, but they moved it to 2013,” said Arciniegas. “That is projects of around US$245m. That will come together with another package, and the total amount will be somewhere around US$630m. That will benefit the insurance industry in constructional risks and surety bonds.

“Colombia is probably the most sophisticated country in Latin America in respect to the regulatory environment and that is exactly why we haven’t suffered a big negative impact. The bank industry is in a very healthy situation, so we shouldn’t expect any negative situations.”

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