Can Colombia Survive Low Oil?

Colombia's decade-long economic boom was built on rising oil production and prices, so how will Latin America's fastest-growing major economy be hit by low oil? LatAm INVESTOR investigates...

Colombia was one of the standout performers of 2014, successfully avoiding the slowdowns that hit regional peers. Yet the sudden drop in oil, which fell by almost 50% in the second half of the year, has left 2015 looking more challenging. After all, Colombia’s 1 million barrels of day production accounts for half of all exports and 80% of foreign investment. Indeed the falling price of oil caused the government to cut its 2015 growth forecast to 4.2% from 4.8%. If correct it would represent a significant slowdown from the 4.7% recorded in 2014, but would still be well regarded in a region where average growth in 2015 is expected to come in at 1.8%.

Silver lining?

Of course government growth forecasts can often be too optimistic. In particular investors are worried that the falling oil price would further increase the government’s budget deficit and the country’s current account deficit. Finance Minister, Mauricio Cardenas, has been working to reassure investors that Colombia will survive the oil price storm.

Colombia's manufacturers are getting a much-needed boost from the weaker peso

On the first front he noted that the government has a diversified tax take, which only relies on oil for 16% of its revenues. And while it’s true that lower oil prices increase pressure on the current account deficit, there is a silver lining. The peso has also dropped with the oil price, which makes other exports, such as manufactured goods, more competitive. Indeed Cardenas estimates that manufacturing will expand by 4% in 2015.

Peace dividend

The falling oil price has already made itself felt in Colombia’s fiscal policy. The government recently announced a $2.4billion cut in spending. A good start but it only covers about 1/3rd of the expected deficit. So far interest rates have remained unchanged at 4.5% but it seems likely that monetary policy will loosen to compensate for the fiscal tightening.

One potential game-changer for the Colombian economy could come from peace. Ongoing peace talks with the Farc guerrilla group have yet to yield any concrete results but it’s possible that an accord will be reached in 2015. Depending on the extent of the agreement it’s estimated that a peace deal could add up to 1% of extra GDP growth per year.