Colombia Gets Some Economic Breathing Room

The election of pro-business Andres Pastrana as president has thrown a lifeline to this country’s floundering financial markets, but the new leader inherits a profoundly troubled economy.

The Colombian peso--under siege for months--has risen sharply against the U.S. dollar, and the country’s stock market has rebounded since the June 21 election. Signs look so good that central bank officials are easing interest rates in anticipation of Pastrana’s Aug. 7 inauguration.

But economists warn that those positive signals are all based on faith.

“We are far from a solid structural situation,” said Salomon Kalmanovitz, a member of the governing board of Bank of the Republic, Colombia’s independent central bank. “The political euphoria has given us a breather, but the fundamental problems are still there.”

Those fundamental problems are mainly related to government overspending, economists and business leaders said. Without counting the income from divestiture of government-owned companies, the 1997 budget deficit was 4.6% of the gross domestic product and is expected to grow this year.

“That is high for Colombia, and it is high by international standards,” said Armando Montenegro, president of the National Assn. of Financial Institutions.

Critics blame the budget deficit largely on politically driven public spending by outgoing President Ernesto Samper. In addition, like other Latin American countries, Colombia has been hard hit by the Asian economic crisis and the resulting lower prices for commodities. Prices have dropped for all of its major exports: coffee, oil, nickel and coal.

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Colombia loses $1 billion for every $1 drop in the price of a barrel of oil, according to the Treasury. On Monday, the price of crude stood at $14.22, barely half the $22 level that prevailed just a year ago. Oil accounts for nearly a quarter of the country’s exports.

Knowing from past experience that a government deficit provokes inflation and currency devaluations, Colombians concerned about the precarious state of the economy began buying dollars late last year, undercutting the peso’s value. The central bank has spent $1.3 billion--about 10%--of its foreign reserves in the last eight months to defend the peso.

The situation deteriorated after populist Horacio Serpa, Samper’s handpicked candidate, led the balloting May 21 in the first round of the presidential election. Moody’s, the credit-rating agency, downgraded Colombia’s debt from stable to negative and Colombians panicked, stepping up their purchases of dollars. The central bank responded by choking off credit so that no one had enough money to buy dollars.

The Colombian equivalent of inter-bank interest rates--the rate at which central banks lend to commercial banks--jumped from 30% to 80% overnight. Bank rates have eased since the election, but the action still brought many companies close to crisis.

“Banks have cut off credit,” said Jaime Alberto Cabal, president of the Colombian Assn. of Small and Medium Industries, which represent more than 5,000 companies, about 92% of Colombia’s industry. “For small and medium industry, credit is their lifeblood.”

Six banks have already asked the Bank of the Republic for emergency financing to help them overcome problems related to the current crunch, Kalmanovitz said.

Now that financial markets are stabilizing, the central bank has loosened credit, he said. “Just a little bit--not enough that people can start buying dollars--but just so that there is short-term lending for business.”

For the moment, the crisis has passed: The peso remains at its highest level in months and the country’s three stock markets have stabilized despite the continuing credit crunch.

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President-elect Pastrana’s first economic move was to name as his treasury minister Juan Camilo Restrepo, a European-educated free-market economist highly regarded by the business community.

Pastrana made revitalizing the economy one of his most important campaign issues. He promised to cut taxes, a popular measure.

But stabilizing the economy will also require painful measures, such as cutting payrolls, economists said--a politically volatile prospect given Colombia’s 14% jobless rate and powerful public employee unions.

“We have to put in place a serious fiscal adjustment,” Pastrana said recently. “We have to put in place mechanisms that will allow us to identify, line item by line item within the national budget, where we can start these needed cutbacks and begin a serious readjustment. We know we have to do it.”