Bogotá — That the Colombian economy would decelerate during 2023 was something that everyone expected. However, although GDP growth in the second quarter was in line with what the market was expecting, the plummet in private investment has been surprising and set off alarm bells.
According to the GDP figures published by the country’s statistics bureau (DANE), gross capital formation, which is the way in which investment is measured, collapsed by 24% between April and June compared to the same period of last year, but in the first half of the year the contraction of this segment is 15.5%, while between the first and second quarter the decline was 13.8%.
Gross capital formation represents the value of durable goods acquired by production units in order to be used for at least one year in the production process. It is defined as the total value of fixed assets acquired minus those sold by resident production units.
Regarding the performance of the economy, the president of Colombia’s association of entrepreneurs (ANDI), Bruce Mac Master, said: “we have repeatedly said that this is a delicate situation that must be addressed seriously and quickly, for which it is necessary to take countercyclical measures to help counteract the effects of the aforementioned slowdown”.
“Furthermore, developing and promoting an agenda for sustained economic growth over time must be a priority for everyone, because only by promoting the right conditions that motivate the creation of companies and investment will it be possible to generate more formal jobs that will, in turn, allow progress to be made in terms of poverty reduction in Colombia. Dialogue and the generation of trust are key to the development of this agenda,” Mac Master said.
Why has investment declined?
During 2021 and 2022, as well as the beginning of this year, household final consumption was the main driver of economic growth. However, in recent quarters its growth rate had already been slowing down and investment was not showing the best signs either.
Andrés Langebaek, director of economic studies at Grupo Bolívar, assures that “this 24% is a trend that has been going on for several quarters, this is not new, what is new is the magnitude of the decline because it is very strong”.
He explains that the fall in investment was foreseeable because “investment has three components: the first one, machinery and equipment which are mostly imported and with the devaluation we had at the beginning of the year, more than last year, many investment plans were cut because if the economy was not growing much why continue with investment plans? On the other hand, the price of imported capital goods increased a lot”.
But beyond what the depreciation of the Colombian peso meant for companies, Langebaek finds part of the explanation for the fall in investment in what is currently happening with the behavior of public works, which contracted 17.9% during the quarter.
“The second important component is public works, and there is a very strong fall there, especially in roads, this comes from the [former president] Duque government, and what we are seeing is that this government does not have much intention, at least in terms of primary roads and highways, to invest, there is discouragement, and add to that that the control of the price of highway tolls may also be discouraging investment,” the Grupo Bolivar director said.
He added that the third component that explains the fall in investment “is residential constructions, the demand to buy housing has fallen due to the level of interest rates and the increase in housing prices due to the increase in costs, and these two factors have caused house sales to fall at rates of 55% per year”.
For Langebaek, “there is a neglect of the infrastructure sector as one of the countercyclical policy components that should have been implemented”.
Perhaps one of the most striking aspects of the weak performance of public works is that usually the last years of local administrations see a good performance because the execution of projects is accelerated.
Daniel Velandia, head of economic research at Credicorp Capital, assures that “a drop of 18% in public works stands out in a context in which a greater activity was expected in the public execution of regional and local governments in their last year of administration”.
But it also explains that “the sequential contraction of investment in housing generates concern in the midst of high interest rates, high political uncertainty and changes to the Mi Casa Ya program. All this will definitely have an impact on the labor market in the coming quarters”.
Although investment did not have its best quarter, Velandia expects a gradual recovery to begin. “In any case, after a very bad first half of the year for investment, we expect a gradual recovery. We are slightly cutting this year’s GDP projection from 1.6% to 1.3%”.
Mauricio Hernandez, BBVA Research economist for Colombia, has two views on the weak investment data: “Regarding future expectations, the most recent and most frequent economic activity data gave mixed signals, which are added to the inconsistency extracted from the GDP publication”, he said.
“Let’s start with the latter. On the negative side is the result of domestic demand, which reflects a weakness in fixed investment and a marked slowdown in private consumption. However, today’s publication can also be given a positive reading from the strong deaccumulation of inventories, which may induce the productive sectors to increase the pace of activity to rebuild lost inventories and put upward pressure on economic performance in the following quarters.”
Finally, Wilson Tovar, in charge of the Economic Research area, explains the fall in investment by citing the political uncertainty surrounding the country due to the government’s reformist plans.
“It is a rather poor figure, business leaders are not encouraged to invest in 2023, partly caused by the uncertainty created by the government with the reforms and political scandals. Business leaders have compressed investments for later,” said Tovar.
