“At this moment, as we are in a tsunami and the wave is still active, let’s say… the corporate decisions are all focused in taking the most urgent actions.” These are the words of Daniel Diaz, managing director of the Colombian investment banking firm Trigono. Colombia reacted relatively fast to the Covid-19 outbreak in the country, but its economy will suffer the consequences.
President Iván Duque has destined 28.8 billion COP (664’233.12 EUR) to handle the pandemic in the South American country thus far (El Tiempo, April 2020), 87% of which comes from loans from the Fonpet (entity of savings for territorial pensions), the FAE (Savings and Specializing Fund) and other financial entities, meaning this liquidity comes from long-term deposits of users.
To further finance the emergency response, the Government introduced a so-called 3-month solidarity tax. It applies to government workers with salaries above 10 million COP (2.306,36 EUR), and it is supposed to provide 395.400 million COP for the government to work with to contain the pandemic. From the gathered resources, 7.1 billion COP were granted to the health system with the purpose of financing testing, intensive care units, new healthcare centres, IPS (Healthcare provider institutes) and EPS (health promoting entities). Moreover, 4.1 billion COP (961.490,18 EUR) are destined for social aid of approximately 7.5 million Colombians.
Based on GDP measures from the fourth trimester of 2019, Colombia is the 39th economy in the world (Datosmacro, 2020). In spite of a strong economic growth in the past year, Colombia’s GDP is expected to decrease due to the COVID-19 pandemic, falling oil prices and confinement measures (see image below). As a consequence, poverty is expected to increase (World Bank, April 2020).
Due to the current global emergency, WTI (US) oil prices fell below 0 on April 20th of the current year. Brent oil (North sea), the referent in Colombia, has also fallen to 19USD (-25%) on April 21. “When one looks at the sector of hydrocarbons and mining in Colombia, they are very important with regards to fiscal income. Therefore, the situation of the oil prices affects the country greatly” says Diaz.
“The effects in the productive apparatus, in the relationships with other countries, in the situation of banks, of the government’s capacity to keep spending (…) there could be chain reactions that we still cannot comprehend or predict. (…) Similar to when a patient’s organ becomes damaged, which causes other organs to malfunction. Let’s say you provide the patient with an adrenaline shot and a series of medications that can damage other organs, in order to save the patient. There are medicines that are invasive, but you use them for those moments of truth. What the government is doing is that it is spending the money it doesn’t have so that things do not fall apart. But in real life, a lot can be falling apart (…)” says Daniel Diaz.
The current fiscal deficit of Colombia for 2020 is calculated to be 4.9% of GDP, in contrast with previous governmental goals of 2.2% (Tax Rule Advisory Committee, 2020). However, given the climate of uncertainty around the global crisis in relations to growth rates around the globe, the entity recognizes that error margins could be larger than usual when calculating such estimates.
“The most urgent measures involve solving financial issues with banks, defining the situation of people and in the case of productive processes, well, deciding what to do with the productive processes; because many of the companies received impact in their possibility of producing and selling.” says Daniel Diaz. Quarantine measures have indeed induced a situation of supply shock. Due to a dramatic increase in demand of sanitary products and a decrease in production, as well as panic hoarding from consumers, the superintendence of industry and commerce (SIC) has reported complaints about an increase in prices of everyday products, along with facemasks, antibacterial and alcohol (El Tiempo, April 2020).
Some measures that were imposed in order to help companies include the postponement of tax payments. This means that approximately 8.1 billion COP of tax income will not be received by the Government (El Tiempo, April 2020). “We all have to roll up our sleeves and work, and surely we will facilitate that companies make a transition once the wave crashes, so that they can continue to be able to operate further on after this imminent crisis”, concludes Daniel Diaz.
“In general, all [economic] sectors are affected, except those that are directly related to healthcare. Even the food industry is affected in some way, given that family consumption becomes selective and thus it decreases”, argues Diaz. Aggregate demand is indeed a classic indicator of the economic recession to be seen during times of COVID-19. “For instance, I was talking to a client in the production chain of pork meat and chicken. I asked him whether it [the pandemic] would have a negative effect on them, since people are still eating. He said that a percentage of chicken consumption of people in a city such as Bogotá is eaten on the streets”.
“The sectors that provide public services, well, they suffer an effect that is not that large, but there is a decrease in electric energy consumption, because the fabrics stopped working (…) everything that has to do with manufacturing and construction is largely affected”, argues Daniel Diaz. Starting from April 27th, Colombia plans to terminate the mandatory quarantine for the manufacturing and construction sectors under strict sanitary measures. Both the construction and the manufacturing sector are the strongest GDP contributors of the country.
“There is one sector in specific that can generate a big crisis in a country like this: construction. First, it is very important for the generation of jobs”, says Daniel Diaz. The reactivation of the construction industry is expected to push income generation for economically vulnerable populations in the country. 14% of Colombia’s workforce (around 3.3 million direct and indirect jobs) is dedicated to edification. According to the Housing Minister Jonathan Malagón: “ There are 980,000 vulnerable workers in the building sector in the country. If the viability of these jobs is compromised, it could not only mean 4 percentage points of increase in the unemployment rate, but also a tragic pilgrimage from formal employment to poverty” (Semana, April 2020). The increase in unemployment is concerning for Colombia, a country with one of the largest unemployment rates (10.5% in 2019) (Datosmacro, 2020).
Following his argument of why economic damage to the construction sector could lead Colombia into a larger crisis, Daniel Diaz states that: “There are many constructions that are being built with bank credit. The possibility of selling these projects lowers, as those who were going to buy them desisted. This could lead to the projects standing still, which can be very harmful for the economy and banks. (…) The companies that are building count with many credits, which they will not be able to pay back, and the estates’ value tends to decrease”, he concludes. “Manufacturing can be reactivated but, in order for people not to catch the virus, they will not be able to work as before for some time. There is also the situation that for manufacturing you need primary resources, but these are not very available because these companies are also not operating.”
When asked what he thought about the re-activation of these economic sectors, Daniel Diaz expressed his worry about a potential increase of infection resulting in another sudden closure. “My big concern is that they open [reactivate the construction and manufacturing sectors], but then if they do not have enough control of the contagious development, they close again. A company is not like Netflix. One can turn off Netflix and turn it on again the next day, and it waits for you. A company needs continuity. It worries me a lot that, despite there being some protocols and manuals, in reality, while we do not have enough testing, in some way the process becomes an uncertainty (…). The intention is good. But it is pretty uncertain because if in 2 months, or 40 days, the infection curve increases, they will close and close [the sectors], the companies will suffer very much. As such, I believe they [Government] could work more on the ways in which the companies will operate. Even in Trigono we were looking at confinement schemes guided not by residence or consanguinity (…) in a way in which one [a company] could take its workers, similarly to what oil companies do, to isolate and take care of them while operating in such a way that people do not return home every day and increase the infection risk. This would have been interesting to explore. At least, while testing is acquired in order to measure contagion well. Otherwise, in some companies there will be massive infections, which will result in the closure of the economy again”.
When asked which place of the country would suffer most due to economic consequences, Daniel Diaz argued that Colombia’s capital would take the hardest blow. “What happens is that the city has such a large contribution in the country’s economy that it turns into a subject that affects the whole country. (…) Income will decrease radically. Restrictions in such a dense and large city has a stronger impact and productive capacity is harmed more.” According to the economist Bruce MacMaster, Cartagena could be one of the cities with the strongest economic impact, given the city’s particularly strong reliance on tourism and high rates of informal work.
Those sectors that have been working digitally and remotely during the quarantine period haven’t had an easy time either. According to the managing director of the investment banking firm Trigono: “The emotional state of people under confinement and isolation makes their performance unequal to that during face-to-face work. That is not only the case in Trigono, but also for example in banks, where work has been sometimes segmented in weeks: Attendance-absence on weekly segmentation, and these kind of things that make attention to the public and to different user problems more difficult.”
“However, once this tsunami wave is over, well, the companies will have financial situations that will need to be dealt with, and then surely there will be the possibility of offering services to companies”, explains Daniel Diaz. The role of those companies that provide services to other companies, such as investment banking, will be sought after when the pandemic tsunami wave crashes, in order to clean up the mess and reconstruct.
Mariana Castañeda:
Mariana Castañeda is a Colombian Communication Science student who’s passionate about politics, writing and her country. Formerly a journalist at the Amsterdammer and an intern at NOOR, Mariana enjoys having friendly debates over a cup of coffee or afternoon beers, inspiring her to write articles such as this one.