Last updated: 13:34 / Wednesday, 17 April 2013
by Luka Barbosa from Itaú

A Package of Measures to Stimulate Growth in Colombia

Image
A Package of Measures to Stimulate Growth in Colombia

Yesterday, the Colombian government announced a package of measures to “boost productivity and employment” and enable “all the sectors of the economy to receive the benefits of economic growth.” Specifically, the government has been worried about the weakness of the non-mining tradable sectors, agriculture and manufacturing, says Luka Barbosa, economist of Itaú.

"Despite the high expectations created before the announcement, we expect the measures to have a limited impact on the economy in the medium to long term. In the foreign exchange market, no effective measures were announced. Finance Minister Cárdenas only said that the government will give incentives for pension fund managers to invest more abroad, by valuing their performance taking into account diversification and risk management instead of just returns.The impact will depend on the willingness of fund managers to really invest their assets abroad".

Fiscal and credit incentives for the agricultural, industrial, housing and construction sectors may have a short-term impact on growth, especially in construction through housing and public works. But, in general terms, none of the measures aims to tackle the country’s long-term structural issues.

FX Measures

The government believes that the main issue hindering agricultural and manufacturing growth is the appreciated foreign exchange rate. To that end, the finance ministry announced that it will provide incentives for pension fund managers to invest more abroad. The performance of pension funds will start to be valued taking into account diversification and risk management, instead of only returns.

The government expects that the changes may increase the share of overseas pension fund investments from 6% to 11%, boosting demand for dollars by USD 4 billion. In countries such as Chile and Peru, pension fund managers invest more than 30% of their assets abroad, according to Finance Minister Cárdenas. The changes add to the current program of international reserve accumulations.

Additionally, a royalties fund controlled by the government called FONPET will buy 1 billion dollars of assets overseas. The measures combined would increase demand for dollars by USD 5 billion, according to the government. Of course, the bulk of the amount depends on the willingness of pension fund managers to really diversify, investing more overseas. We expect no major impact on the FX rate.

Fiscal Measures

The most significant measure announced is a reduction in mortgage rates charged by banks. According to the government, the interest rate on housing loans for the middle class will fall from 12.5% to 7.0%, with 2.5% of the decrease being subsidized by the government and the rest by the banking sector.

The government has been urging banks to lower rates in the past months, arguing that the banking sector has not passed on the policy rate cuts to their lending rates, thus not helping the economic recovery. Less than one year ago, authorities were worried about too-fast consumer credit growth and increasing leverage among consumers, and so they acted with macroprudential measures to stem credit expansion, continues Barbosa.

Also, the government anticipated in two months the reduction of non-wage labor costs for companies approved by the end of 2012 in order to “stimulate a rapid creation of formal employment.” The measure reduces labor costs by 5%. In addition, the government announced that the mining sector will pay a higher withholding tax than the manufacturing and agricultural sectors, which “helps the cash flow” of the latter sectors.

Tax incentives for the industrial and agricultural sectors were announced. Taxes on imported capital goods and raw materials will remain at 0% until August 2015. Taxes on electricity for the industrial sector were reduced. Specific fiscal expenditures to improve the development of the agricultural sector will also take place.

The finance ministry will also speed up the construction of roads and invest in the quality of transportation. The government said that it is working on laws that improve the efficiency of infrastructure projects.

The fiscal measures will cost the government USD 2.8 billion. Cárdenas argued that the stimulus doesn’t jeopardize the anti-cyclical fiscal framework because the fiscal cost will be spread out over several years.

 

 

menu
menu