LDN - Business

Colombia policy lurches chill investment, risk economic growth

[March 21, 2024] By Nelson Bocanegra

BOGOTA (Reuters) - Colombian President Gustavo Petro's track record of unpredictable policy lurches has contributed to a sharp drop in investment that is expected to continue this year, as some business owners complain strategic planning has become almost impossible.

Leftist Petro was elected in 2022 promising to reform healthcare, labor laws and the pension system, as well as fight poverty and raise taxes on high earners.

But more than a dozen company executives, bank analysts and industry associations told Reuters inconsistent polices in sectors ranging from housing to electricity were undermining investor confidence and hurting economic growth.

Colombia's economy, the fourth largest in Latin America, grew 0.6% last year, about half of what had been predicted, and private sector investment dropped by 24.8%.

Falling investment could keep GDP growth at 0.8% this year, according to Colombia's central bank, insufficient to meet social and fiscal needs. Some analysts predicted a 4% drop in private investment in 2024.

"Every day there are announcements, which has an effect," said Mario Hernandez, who owns businesses in the construction, retail and agriculture sectors, including an eponymous fashion brand, that employ about 1,000 people in Colombia and a similar figure abroad.

"We are stopping investments to see what happens, because we don't know with this government, the insecurity and the confidence in the country," Hernandez said, adding his businesses were struggling to keep workers employed.

Three other executives from different companies, who asked not to be named, told Reuters they were also holding back investments because of the uncertainty.

During the last year Petro has changed the structure of subsidies for public housing, threatened to intervene in electricity prices and temporarily frozen toll prices for road concessions.

The moves have stoked concerns among business owners that numerous industries may face more government intervention.

Construction of new houses fell more than 39% year-on-year in the first two months of 2024 because of the public housing subsidy change, according to construction guild Camacol.

In February, Petro's government announced it would change financing for infrastructure, leaving big projects like Bogota's long-awaited metro short around $200 million in funding.

Vehement criticism from business guilds prompted an about-face by the government days later. In March Petro again suggested renegotiating metro contracts, a proposal the capital's mayor Carlos Galan said was "legally impossible and technically inviable" and could lead to lawsuits.

Business leaders said legal precedents and already-signed contracts should be respected.

[to top of second column]

Demonstrators protest against Colombian President Gustavo Petro's reforms in the health, retirement, employment and prison sectors, in Bogota, Colombia March 6, 2024. REUTERS/Luisa Gonzalez/File Photo

"If companies don't have the legal, physical or political security that their business is going to last, then there is effectively a brake as people wait to see what happens," said Maria Claudia Lacouture, head of the Colombian-American Chamber of Commerce.

Petro's proposed reforms to healthcare, labor rules and pensions have also chilled potential investment, said Bruce Mac Master, president of business association ANDI.

"Not even a really crazy person would invest right now in building a hospital if they don't know how it's going to exist in the system," Mac Master said.

IN THE RED

Although investment in Colombia is set to contract by much less this year than last, it will remain in the red, analysts said.

"The feeling is very negative," said Felipe Klein, economist for Latin America for BNP Paribas, after meeting in Bogota with businesses and bankers.

Finance Minister Ricardo Bonilla has attributed a significant part of the fall in investment to a drop in business inventories that accumulated during 2021 and 2022, when domestic consumption was lower because of the coronavirus pandemic. He also blamed high interest rates and inflation.

However, think tank Fedesarrollo says gross fixed capital investment, which excludes inventories, was down 8.9% in 2023 to its lowest level in 18 years. It also blames Petro's policies, with director Luis Fernando Mejia warning that lower economic growth would lead to lower tax income and higher public debt.

Colombia will not comply with its fiscal rule, meant to block deterioration of public finances, this year if planned 2024 spending is carried out, an independent committee said this week.

Earlier this month commerce minister German Umana dismissed fears and underlined improved foreign direct investment last year, which he expects to rise up to 4% this year.

International investors are likely not following the play-by-play of Petro's comments and social media posts, said Munir Jalil, BTG Pactual's head economist for the Andean region, and may have longer-term investment strategies.

"One could almost say that foreigners have more confidence in the country than locals," Umana told Reuters, as he urged Colombians to give political change a chance.

"In the medium term we are transforming a development model that hasn't changed for 30 years."

(Reporting by Nelson Bocanegra; Writing by Julia Symmes Cobb; Editing by Christian Plumb and Nia Williams)

Back to top