Central Banker Expects Significant Damage From Colombian Unrest

Bookmark

May 13 2021, 7:47 PMMay 13 2021, 9:11 PMMay 13 2021, 7:47 PMMay 13 2021, 9:11 PM

(Bloomberg) -- Colombia faces a “grim” economic growth outlook this year due to social unrest and a surge in Covid-19 infections, according to the central bank’s newest co-director.

This means that the economy is unlikely to expand 6% in 2021 as forecast by the bank earlier this month, said Jaime Jaramillo, who was named to the board in February.

Anti-government demonstrators have barricaded highways in recent weeks, disrupting business across swathes of the country and blocking access to Colombia’s main Pacific port. The protests were sparked last month by a government plan to raise taxes, but have continued over a range of other grievances even after the proposal was withdrawn.

“That is really damaging the economy in a significant way,” Jaramillo said Wednesday in a video interview. “I don’t think we’ll get to 6%. This is something that will diminish the ability of Colombia to bounce back by as much.”

A third wave of Covid-19 infections which has left intensive care units close to capacity also darkens the outlook, he said.

Record Low

Policy makers cut interest rates to a record low 1.75% last year to support the weak economy, which saw a surge in unemployment, poverty and hunger amid the pandemic. Jaramillo says the bank could temporarily allow inflation to exceed its 3% target as it prioritizes the economic recovery.

“You have the big squeeze in aggregate demand and supply,” Jaramillo said. “To the extent you’re going back to normalcy, it is OK to allow inflation a bit more above the target. At least in my mind. The board is seven people, I’m just one of them.”

Annual inflation slowed to its lowest level since the 1950s last year, picking up to just 1.95% in April.

Risk of Junk

The bank left its policy rate unchanged last month, but warned that a loss of investor confidence over the widening fiscal deficit would make it harder to continue providing this much stimulus. Colombia’s bonds are rated just one notch above junk, but Jaramillo says he isn’t “terribly concerned” by the threat of a credit downgrade.

“At the end of the day, it’s not a big deal. Countries that become fallen angels can come back fairly soon,” he said.

At the same time, Jaramillo said he and other board members are worried by the fiscal deficit crowding out private investment. Colombia’s deficit will widen to 8.6% of gross domestic product this year according to the government’s forecast, from 2.5% in 2019.

Many governments in Latin America face deficits that ballooned during the pandemic, but unlike Brazil, Mexico, Chile and Peru, Colombia’s will widen rather than narrow this year, according to forecasts from the International Monetary Fund. This is concerning because it makes the nation an outlier, Jaramillo said during the interview.