Colombia (and the rest of the world) is poised for steady growth following a post-pandemic bounce
As one of the most dynamic economies in Latin America, Colombia’s strong post-pandemic recovery set the tone for many of the region’s stakeholders in 2022, with many factors contributing to the country’s economic climate. As Colombia continues to attract foreign capital at record levels while cementing itself as a global center of commerce and innovation, investors interested in diversifying their portfolio should take the time to understand these variables so they can better map their strategy for sustainable growth.
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A Big-Picture Overview of the Colombian Economy
Measured by GDP, Colombia is Latin America’s fourth-largest economy. Although 2022 was a challenging year in many respects around the world, Colombia’s GDP still grew by around 8 percent.
Looking forward, the double-digit inflation the nation experienced in 2022 should moderate as Colombia joins the rest of the world in experiencing the widespread deceleration forecasted for 2023. Economic growth for other Latin American powerhouse nations like Mexico and Brazil is set to slow to around 1 percent, with Colombia expecting 1.5 percent.
Colombia’s Multifaceted Economy
Diversification is one of the key drivers of Colombia’s economy, as for example, the country boasts the world’s fastest-growing IT industry while also being one of the largest shipbuilding industries outside Asia. The country is also Latin America’s second-largest producer of domestically made electronics and appliances.
Another collection of powerhouse industries is often referred to as the Orange Economy. The Colombian government has consistently supported exporting modern Colombian pop culture and cultural commodities to the world since the early 2010s. Colombian films, music, TV shows, cuisine, and beauty products are widely appreciated internationally. This track record also fuels tourism development – another fast-growing industry. The number of tourists visiting Colombia grows by about 12 percent every year, with a larger segment being eco-tourism focused on exploring the country’s incredibly diverse natural environment of snow-capped mountains, dense tropical jungles, and arid deserts.
However, Colombia is best known for its agricultural sector and exports. It’s one of the largest producers of coffee, avocados, and palm oil in the world, as well as a significant global producer of sugarcane, limes, coconuts, bananas, cocoa, pineapples, and more.
New President, New Fiscal Policies
Following the severe impact of the COVID-19 pandemic, Colombia’s economy roared back in 2022, showcasing the country’s resilience. A strong economic recovery and a weak peso drove strong exports and GDP growth that continued to exceed pre-pandemic levels. Thanks to a greater degree of structural strength than many of its neighbors, Colombia maintained high rates of private consumption and kept its economy afloat despite strong inflation.
A significant development from 2022 that will affect Colombia for years to come is the election of the Gustavo Petro. So far, he has proposed various changes for extractive industries, healthcare and pension systems, and ambitious political reforms that will change the country’s financial backbone.
A shift away from traditional economic drivers
Although historically petroleum has been the country’s most important export, President Petro plans to rapidly accelerate the last few decades’ efforts to diversify its export capabilities. But replacing the economic contribution of extractive industries will be no small feat, as it will require substantial growth from sectors like tourism and sustainable agriculture.
Private consumption remained strong in 2022, enabling the Colombian market to shake off some of the economic costs associated with pandemic healthcare spending. The country’s GDP in current prices more than tripled between 2000 and 2015. Following strong growth in 2022, 2023 is expected to be much slower for Colombia and the rest of the world, although we can still expect expansion.
The ongoing impact of inflation
As in many emerging economies, inflation continues to be a challenge for Colombia. Colombia’s aggressive stance on interest rates didn’t eliminate the rising inflation threat, but it also didn’t hamper the economy.
The 2022 year-over-year inflation rate was nearly 12 percent, but it is expected to moderate in 2023. Colombia’s central bank, Banco de la República, has signaled that it is nearing the end of the rate hiking cycle, and toward the end of 2023, the reduction cycle will likely begin.
Currency rates are another metric to consider when evaluating the overall economy, and since the middle of 2022, much like other currencies, the Colombian peso has fallen significantly against the U.S. dollar. This can be especially attractive to foreign investors, as the weakening peso gives U.S. investors a favorable arbitrage opportunity when investing in Colombia’s economic growth, especially for items that will be exported back to the United States.
The evolving U.S.-Colombia relationship
Another item on President Petro’s reform list is the U.S.-Colombia relationship. His positions on Venezuela, migration, and a new approach to addressing the illegal drug trade differ drastically from the past. Although the two nations have long been strategic partners in the Americas, Petro’s government has sought closer relations with the U.S. than Colombia’s previous administration. In general the two countries continue to forge closer ties, with a recent highlight being the Biden administration’s delisting of the Colombian FARC as a terrorist organization. This points to its transformation into a peaceful political party and the demobilization of its armed component.
Despite fiscal constraints and tax reform, regional peace and stability will encourage government spending that drives domestic demand and foreign investment. Ultimately, these factors will help drive GDP growth and build the Colombian economy alongside one of its most important trade partners, the United States.
The Colombian Labor Market Is Ready for Investment
Historically, Colombia has ranked higher than most advanced economies on indexes of economic inequality. According to the OECD, the data shows that the poorest 20 percent of households in the country earn 3.7 percent of its total income, keeping per capita income low and many at a high risk of poverty and crisis, especially for rural families in need of jobs.
However, this is rapidly changing as Colombia’s employment and economic activity rates reach new highs. As the economic outlook for the country improves, unemployment should continue to fall as its labor capacity increases, while still offering low operating costs to foreign investors, especially in agriculture.
As of January 2023, the Colombian minimum wage equaled approximately $243 USD per month, which is significantly less than in the United States where the cost of living is much higher. As income inequality stabilizes throughout the country, the quality of life for Colombia’s workers should continue to improve, as will the productivity of its established businesses and competitiveness on the global stage.
Public Debt Creates Opportunities for Foreign Investment
The pandemic caught governments worldwide by surprise, and Colombia was no exception. Like most countries, Colombia’s government balances suffered immediately following the first restrictions in March 2020, prompting extraordinary fiscal efforts on behalf of its central bank to limit the impact on growth, protect the private sector, and set the stage for a strong economic recovery.
More recently, Colombia has taken decisive action to roll off transitory COVID-related spending, improve tax administration, increase its benchmark interest rate to fight inflation, and boost revenues by incentivizing foreign investment.
For example, the general government deficit is projected to decline to 4.6 percent of GDP in 2023 (down from 7.5 percent in 2022) through tax reforms designed to increase government revenue.
Unlike in the United States, where the federal deficit has now surpassed $31 trillion dollars with no plan to address it, the Colombian government is taking the following steps to encourage investment that can drive revenue and ultimately reduce the country’s debt as a percent of overall GDP:
- First Employment Deduction. Employers can deduct 120 percent of payroll taxes paid to first-time employees under the age of 28.
- 50 Percent Energy Efficiency Income Tax Deduction. Taxpayers with energy-efficient businesses can deduct 50 percent of their investment for up to 15 years.
- Ten-Year Tax Exemption for Rural Development. Companies that meet certain conditions and provide jobs to rural areas can enjoy a ten-year exemption on their income tax liabilities.
This is especially important when considering the situation of some of Colombia’s neighbors in Latin America. The region was hit particularly hard by the lowering of credit scores, investment grade ratings, and the World Bank’s growth assessment.
If President Petro implements reforms that can reduce its public debt, invest in the private sector, increase social inclusion, and promote Colombia’s new direction, the country will undoubtedly become a greater regional power. Thanks to prudent moves by Colombia’s central bank, plentiful natural resources, and strong domestic demand, the country is set for a stable economic trajectory with modest but steady overall GDP growth in the medium and long term.
Colombia Presents Exciting Opportunities for Investors
Despite, or maybe because of, the challenges on the horizon for the global economy in 2023, investors will need recession- and inflation-proof investing alternatives to diversify and protect their portfolios.
Emerging markets like those of Latin America’s anchor economies present compelling opportunities for investors, and the outlook for the Colombian economy and its future growth is among the strongest in Latin America. The country becomes an even more attractive destination for foreign investment given that the weakened Colombian peso gives U.S. dollar-based investors an additional arbitrage opportunity.
Further, the new regime’s push to replace coal, oil, and gas extraction with alternative economic drivers and sustainable agriculture is another reason why Colombia is a prime candidate for international investors looking for a dynamic, growth-oriented opportunity.
To learn more about how Farmfolio’s direct farmland ownership program allows individuals to diversify their portfolio and earn passive income from the anticipated economic growth in Colombia in 2023 and beyond, just fill out the form below, and we will be in touch with more information.