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Colombia: Drug Scandal Stirs Economic Discontent
Samper's entanglement in the scandal over drug kingpin donations lo his election campaign has disrupted Colombia's financial markets, dimmed Us near-term economic outlook, and worsened Us bilateral economic relations with Washington.
Polls and pics* reports indicate thai the business community believes (he scandal has deterred investment, and increased tension with the United Siaies on trade issues.
Private-sector leaders also question the government's estimate that GDP grewercent tnis year, pointing to an increase in unemploymentontraction in the manufacturing sector in August as evidence that growth will more likely reach onlycrccnl-well below listcrccni expansion. I
The economy's underlyinghe petroleum sector-will probablyo weather the crisis.
Strong growthew sectors while other, more labor-intensive industriesharp slowdown could, however, increase private-sector discontent over Samper's management of the economy.
Distracted by the scandal, Samper has lost the focus on regional trade integration that previously had domutaled his foreign policy agenda.
He is likely to shy away from new Integration commUments in the near term and might introduce protectionist measures that focusew key products to shore up his support in the business community, as he has in the past.
Worsening relations wUh Washington could also cause Samper toare prO'Latin stance on trade issues, but his wish to maximize Colombia's access to foreign markets will keep him from renouncing hemispheric trade integration^
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Market Fears, Government Assurances
Inci^jninating revelations of the connections between the Cali cartel kingpinsSamper's election campaign have had their greatest economic effectfinancial markets. The stock market has plunged by moreantiago Medina, Samper's campaign treasurer, was arrested onuly, anddown by nearlyercent from its peak inhe peso,dropped byercent since Medina's arrest and roughlyercentovershootingpercent depreciation target set by the governmentbeginning of the year. Reflecting in part live disruption in thehe businessmen surveyedoll conducted in Octoberajorthat the polilical crisis had damaged (heuarter ofconsidered the economy's major problem to be the uncertainty caused by
The government claims that Ute economy has not suffered damage from the scandal, citing as evidence iis estimate that real GDI* expandedercent this year, roughly the same as lastcrcent growth. Bogota attributes the relatively strong showingickup in the petroleum and agricultural sectors andpen;enl surge in exports related to the declining peso. Hard currency reserves have roughly stabilized following their fall from record highs in the aftermath of Medina's arrest, with unexpectedly low inlernalional prices for coffee offset by increased exports. Inflation, moreover, decelerated slightly, allowing the Central Bank to lower reserve requirements fromercem toercem in mid-October.
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Private-sector sources have questioned ihc government's figures, however, and identify weaknesses in other key sectors of production. According to private-sector estimates. GDP is growingercent pace. Business sources point out that sales have slumped and that inventories arc piling up; auto sales, for example, fell by aboutercent in the firstonths of this year, withpercent dropoff in October. One leading ihink tank claims lhat political uncertainty and high interest rates have caused businesses to cancel or postpone one-third of the investment projects planned al the beginning of this year. An increase in unemploymentercent in4ercent this September gives credence to their criticism. In late November, even the government acknowledged that industrial production during (he first eight months5 had fallen to its lowest level in four
years, and that the sector contracted in August. Some economists believe that the crackdown on drug cartel kingpins has added to economic difficulties stemming from (he political crisis. Diminished inflows of laundered hard currency have helped push up the exchange rate and have dampened growth by reducing trafficker investments in the construction sector, especially in the Cali area, accordingress
Lookingturdy Economy Wilh Some Flaws
The economy has the underlying strength to withstand the crisis over the next six months or so, even though its rate of growth may well be slowing. The petroleum sector probably will continue to prosper because oil investorsong-term view of their involvement with Colombia and have been undaunted by Samper's troubles. The economy will also benefit from the lagged effects'of an upswing in nonpetroleum foreign investment, which grewercent through July, according to official government figures. The strong performance of nonpetroleum exports probably will help boost GDP as well. Most local forecasters continue lo predict that growth for next year will be higherercent, even though few find the government's projectionercent growth plausible.
The slowdown in the rale of growth and sectoral imbalances, however, could increase private-sector and labor discontent over Samper's management of the economy. Industries that face dimming prospects-such as construction, retail sales, and manufacturing for the local market-are labor intensive and politically powerful, whereas ihe economy's bright spot, the oil sector, employs relatively few people. Moreover, the Central Bank has said that it expects lo lighten its monetary policy early next year, reverting topcrccnt reserveove it probably sees as necessary to offset the inflationary effectpercent hike in government spending. DisgrunUemem in the sectors most sensitive to interest rate changes, such as construction, could also increase if the unsettled political crisis continues to push down the peso, maintaining upward pressure on rates. Demand for local credit would rise as (he depreciating peso increased the cost of foreign borrowing. The Central Bank abo might choose to boost rates if capital flight induced by the sliding peso increased significantly, forcing the Bank to find methods other than its customary market intervention tactics to control the exchange rate and protect reserves. These effects would be magnified if political tinccrtainty drove away new foreign investment or if successes against drugaundering networks sliarply restricted illicit hard currency inflows!
Weakened Political Position Diverts Samper From Trade Integration
Samper's political support tn the business community-crucial to his survival indiminished greatly over the last few months, press I
indicalc. although he retains the backingew key magnates. In addition to their concernslowing economy, many businessmen have been alarmed by Bogota's deteriorating relationship with ' *"
plan to increase puonc spenair needed to finance it.
Mureuver, me private scclor disapprovesnd has loudly objected to the tax hikes
Samper struggles with the political challenges resulting from the scandal and focuses on domestic economic issues io regain popular support, he has paid far less attention In regional trade-opening initiatives than he did eailicr in his trim. This comparative neglect allows him to avoid further agitating the business community, where backing for additional lowering of trade barriers is mixed. Polls indicateignificant number of businessmen, especially those in agriculture and textile manufacturing, believe that trade liberalization was implemented by the previous government too quickly and lhat it hurt their
Given his other problems, Samper is unlikely to antagonize these busincssmen-or risk worsening Colombia's current account deficit, still growingurge in exports this year--by pressing for new agreements that would require Bogota to lower tariffs significanUy in the near future His tendency to introduce narrow protectionist measures, as he did with nee and sugar nr.pons from Venezuela earlier this year, to assuage husiness complanu suggests he may even lake small jieps backward if be calculates thai they would shore up his support. But because he. his advisers,Mifaer of buranc urn en alto wish to maximize Colombia's access to foreign markets, he is not likely lo renounce regional trade integration Indeed, he probably willonstructive pose toward ihe proposed free trade area of ihc Americas, raising his profile on ihe issue if he is still iu office when the hemispheric trade ministerialarch.|
Prickly Relations With United States Affect Policy
Rising tensions with Washington are affecting Bogota's stance on several trade and investment issues, despite the desire of businessmen-and ihe Samper administration-in protect their US trade privileges.
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As long as bilateral tensions remain high. Samper is more likely to focus attention on South American integration than on possible NAFTA accessionreludeemispheric free trade area. This stance wouldurn southward that became evident early this year and would be reinforced if the US Congress fails to approve fast track legislation for negotiations with Chile. Bogota is unlikely toonfrontational approach in its trade relations with the United States, however, for fear of losing its preferential US market access, further alKnating the business community, and being ostracized from the hemispheric integration process largely guided by Washington.1
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Harbingersuch Weaker Economy
The economy could weaken mote dramatically than we anticipate if several, relatively unlikely, events occur.
Samper resigns or is forced to leaverolonged breakdown in the constitutional system for presidential succession could greatly damage investor confidence, deter new capital inflows, and increase capital flight.
all-out insurgent assault on the petroleum infrastructure could derail large projectedrude production next year, crimping both hard currency inflows and governmeni revenues, i
significant downturn in internauonal oil or coffee prices or in drug money inflows would also have severe, but less costly, ramifications.
Policy missteps by the government could also diminish prospects for growth, although their effects would be less dramatic. Runaway spending at the municipal levellowing economy could throw off current budget projections. If Bogota fails to revise its spending plans to keep them in line with revenues as the year proceeds, inflationary pressures could kick up. leading the Central Bank to boost interest rates still further. The economic downside of these developments would be steeper if the government responded by taking steps to eliminate or drastically limit the Bank's autonomy, wliich could erode investor confidence in the country's monetary stability.
olombia: MartHD Hit by Scare
Original document.
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