Remarks: José Antonio Ocampo at the 2022 Latin American Cities Conference in Bogotá
Remarks: José Antonio Ocampo at the 2022 Latin American Cities Conference in Bogotá
Colombia’s new finance minister spoke about the country's economic trends, risks, and opportunities.
Remarks by Colombia’s Minister of Finance José Antonio Ocampo at the Latin American Cities Conferences in Bogotá on August 26, 2022
Note: What follows is a transcript of the English translation of the finance minister’s remarks. View the remarks with English translation below.
First, I'd like to start by thanking Mauricio Santamaría for this invitation and being with you and also my greetings to the Council of the Americas for organizing this event and all the people here participating and all the panelists, William Maloney, chief economist of the World Bank.
I’d like to now quickly present some of my slides to give you the economic scenario, just like we have it from the government perspective, but also to end up with these three important challenges for the economic policies as far as the productive activity and the challenges that we're having with this international crisis. First of all, I must say that Colombia has had a very pronounced recovery the second semester of last year and the first one of this year.
And this has been possible thanks to our fiscal policies because Colombia had a fiscal and monetary policy that was very expansionary from last year. But now we have an inversion, especially in the monetary policy. So that creates some questions regarding our future.
This recovery has been unequal on different sectors. Here we have some data from 2020. Compared also to the recovery in 2021 of 10.7 percent. So that was a positive trend. Some Latin American countries that have fared very well: Chile, Panama.
Here we have the two factors in fiscal policies. We see the two yellow columns, the nominal growth of primary expenditure that was very pronounced in 2020, especially during the pandemic, but continued to be the same in 2021. 6.6 percent, which is in real growth.
That's very important. And just this year, we have the beginning of a moderation in public expenditure. Nonetheless, we can see that the fiscal deficit is very pronounced. We see that the Bank of the Republic increased the rates. But at the beginning of this year, as we know, the increase has been very pronounced. And then we'll see the real rates. As far as economic recovery, the growth has been positive—very positive—especially at the beginning of the second semester of last year at the beginning of this year. We can see the performance of the economy, but now we have a negative inflection in May. Those are the latest figures that we have. On the right, we can see the figures per semester, especially the yellow line, which is the 2019 growth by quarter. We see that the last quarter, at the beginning of the first two quarters of last year, there was a negative growth because of unemployment.
But then we have a very pronounced recovery of 11.3 percent growth. Of course, we're comparing this with figures from three years ago. It has not been a spectacular growth, but most likely they're going to tell this government that this government has been responsible for an acceleration of the economy.
So it is positive, but it's not an extraordinary growth. However, we have some promise in certain sectors. As we see, there is a lot of inequality as far as the growth of some productive sectors. We have arts, recreation, leisure, followed by communications, information, and communications. They have had a dynamic development because of the pandemic. And on the negative side, we have other sectors that have not been able to recover, especially mining and construction. Construction and civil works and housing mainly have province in civil works.
Those are falling behind. The first item at risk is inflation, of course. Inflation is an international phenomenon. And not just strictly Colombian. It has generated an international phenomenon. The board of the Bank of the Republic has increased the interest rates as well.
And I would say that the goal was to counteract inflation. But I would say that the most important [thing] has been to avoid the flow of capital outside. However, we see that because of the effect of inflation, we're going to have limited measures.
There's some demand at a Bank of the Republic for international prices, of course, for this phenomenon in Colombia that we call indexation. So this has generated some inflationary inertia. But we've seen this also last year.
Last year we were in the midst of this process. It was a complex process. So that is an important challenge as far as the inflation policy. As far as inflation goes, we can see that we had 10.2 percent inflation trend, but in foods was also through 5 percent.
So the highest figures in Latin America. And as far as the basic inflation and thanks also to the Bank of the Republic, is the 6.4, especially in the sector fuels. As far as real terms, we can see the 9-percent rate. The total inflation is still negative, but we have now 2.6 percent compared to the basic inflation. So I would say that we will see with the board. The board will make decisions on interest rates, and we'll have to see what the consensus will be. So the increase in interest rates has had an impact on all economic sectors. We have had a strong increase both in deposits and credits. On the right, we can see the interest rates of government bonds, the test bonds.
We've seen a very considerable increase. But you can see that in the end this process has stabilized itself. But not quite yet in the financial system. But there is a slight trend downward. Financing the government deficit. This is very different, for instance, when we have a tax rate over 4 percent, when compared to what we have now: the fiscal rate of 10 percent. As far as the international context, that's a second negative item. But there's one positive trend for Colombia.
First of all, the global economic growth has slowed down considerably. Also, the international trade. We have the issue of the price of commodities in the international trade. That has a positive and negative element for Colombia. Positive is that our product of exportations has a very high price.
The other negative trend is the toughening of international financial conditions, meaning that the access of emerging economies to private markets of capital has been very difficult during this year as far as the growth of a global economic growth.
Last year, there was an estimated growth of 6.1 percent. So now we have a downward trend. You can see that this is a global trend with the only exception of a large country of India that has fared well. But Latin America was one of the worst regions in the world. But now it's not so serious. And the ECLAC also has forecasted growth. ECLAC forecasted 2.7-percent growth. As far as commodities, we have on the left, prices of energy and food items with a spectacular growth, especially after the invasion of Russia on Ukraine. Although it had already started the end of last year. You may observe that the food items and energy products have started to go down. So that's a positive element.
I believe that now we got to the peak, globally and in Colombia, and we'll see that in practice. This downward trend is going to be very slow in the case of the United States. Inflation is still very high for the historic standards of the United States.
So the debate right now is to see what is going to be decided and discussed. There's going to be an announcement by the president of the U.S. Federal Reserve. The positive trend has been the exchange terms, the red line in Colombia that has had a 25-percent improvement—much better, as you can see, compared to Mexico and Peru.
They have had a negative performance. The last element is the rise of risk crimes and interest rates, as we can see now. The risk per country on the left of emerging countries compared to Latin America. That's a little bit higher in lighter blue with worse than the average emerging countries. We have Colombia, which has had a very strong decline as a result of losses of investment of last year. And on the right, we have the comparison of Colombia with other Latin American countries. We see that Colombia had some risks more comparable to Mexico last year.
But then after loss of investments, we have gotten close to Brazil. So in a category of higher risk. However, you can see that during the last month, we've had a downward trend in risk in Colombia.
We'll see if this possibility will turn into a positive trend. Now the determining factors are the interest rates. We can see that the comparison in Latin America, the long-term U.S. interest rates in lighter blue and the risk spreads. So the interest rates in the United States are very important as a determining factor of the interest rates of emerging economies in Latin America. But you may observe here that during the last two months, the long-term U.S. interest rate has started to go down.
Therefore, that has also brought down the Latin American bonds interest rates. This is very interesting and important because even though the United States there may be some expectations of an increase of interest rates in the short term, the long-term ones will go down, as this chart shows you. And this creates the possibility for Colombia to go back to the market of emerging economies. But so far, the general trends have been very negative. You can see the flows of capital of emerging economies by JP Morgan. You see all these red columns.
These are the hard currency bonds. You can see the collapse of March of last year in 2020. It was astounding. But after that, in mid-April of 2020, they turned positive. We had positive flows for the remainder of 2020 and 2021. But you can see at the end in 2022, we have negative trends once again. The same thing happens with the yellow columns. These local bonds of emerging economies in 2020 was very negative, but it started being positive in the middle of 2020.
In almost every month of 2021. But then they become, again, very negative. So the capital flows of emerging economies as far as cost and availability have been very negative. In this context, Colombia has fared poorly, especially in monthly purchases of test bonds from abroad.
Yesterday, Bloomberg announced the amount of bonds from companies in Canada and Middle East and some European countries that have increased the purchase of Colombian prints. And on the right, we have a positive trend. One of the positive pieces of news from this the last week was the visit from the president of Spain. If you take away the natural resources from Spain, the main provider is Colombia. So 1.5 billion more in direct investment.
So as far as investment, it's going very well. So you have the opportunity in New York mid-September to continue generating a positive image of Colombia to show the investment opportunities. So we have a very complex economic situation and trend of this slowdown of the economy during the second semester, especially in 2023.
But we still have very unequal forecasts. In terms of semester, it will go from 10.5 to 2.7 in the second semester. And on the right, we have the current most recent projections from the Bank of the Republic.
And the Minister of Finance 1.1, it seems to me a little bit pessimistic, and 2.2 is very similar. That was published last month. So I would say there were between 2 and 3 percent. These are the provisions from 1993. I'll end up with what the challenges for the government are in terms of economic policies. I mean, I could include more, but there are three. The social area where we have the labor market but also inequality and poverty that have gone up in the past year, especially even before the pandemic.
So these are the reason of the social discontent in Colombia. The second thing that I didn't mention before because to me is very important is the high commercial deficit that requires a pronounced diversification of exports. For me, this is the most important priority for the government.
And thirdly, public finances. And this is what I need to grapple with. And it has to do with the proposed the tax reform that has been subject of a large debate, and I will refer to these at the end of my presentation.
So socially, we can see that we were able to have a recovery as far as unemployment, and we have very high figures for unreported jobs during the pandemic. And then as far as poverty, since 2019, even before the pandemic that we had.
So that means that today we have 4.6 million more poor people compared to 2018. And we also have inequality that has gone up based on the recent data. This is the recent labor history that collapsed during the pandemic. The loss of 6 million jobs. But then the recovery. In 2021, the whole economy started a very pronounced record during the middle of last in the middle of last year. So we could say now that we have been able to have a strong recovery.
However, the unemployment rates are still high. In fact, 11 percent of total unemployment rate is higher than the one that we had pre-pandemic. On the other side, we see on the right much higher unemployment rates. But compared to other Latin American countries, Colombia is among the worst in Latin America as far as unemployment.
We are competing against Brazil and Peru. Especially with Brazil, as far as one of the highest unemployment rates in Latin America. As far as poverty, we see the increase in poverty during the pandemic in 2021 is improving a little bit in 2022. But we have the increase of poverty that already started in 2019.
As I say, 4.6 million more poor people compared to 2018. So it's one of the highest ones in Latin America, just like inequality. So this country requires a very strong social policy. We have a very high commercial deficit in current accounts, although all exports items are recovering.
As far as commodities, however, we're just at the beginning of a long process of export diversification that needs to be a priority, not just for this government, but for the following ones. We can say that we're in a similar situation compared to the 1960s, when the country had to diversify itself and not only focused on coffee, and we took 15 years to achieve a successful diversification. Now we need to diversify as far as oil, and this should be a long-term diversification. And I believe that this is related to revert de-industrialization, what we call in economics, a premature deindustrialization.
Compared to developing countries. And it has to do with another problem, which is the very low investment in science and technology, as we will see in in a few minutes. We have here the current account deficit, 6 percent of the GDP comparable to the ones that we had in 2014, 2015, when the oil prices plummeted. This has been financed with direct investment. But we need corrections of this deficit. Perhaps this is the main engine of economic growth in a country. Last year, all the exporting groups improved. Compensating in many cases to decrease in the fall in the pandemic.
On the right, we see the total exports for this year. The first semester was very positive, but if you compare it with the past, yeah, it looks positive compared to years of crisis that started with the oil fall. But compared to the levels of exports that we had in 2011, 2013. As far as non-oil exports, we had a good recovery in 2021 and 2022. However, we have not achieved the 2018 levels or even 2012 or 2013 levels.
So we have a long have ahead of us. During the past years we've had a positive trend. I remember when I was part of the board of the Bank of the Republic, a journalist asked me what would be: “What should be the growth?” And I said: “20 percent per year,” and I should say that that's the correct figure. So we have two years growing at that level. We need 50 more at least. So that's the challenge, not just for this government, but for all of the following governments.
The other area is this collapse of the participation of the manufacturing industry in the GDP. So as I stated, one of the goals is to re-industrialize Colombia. And you have seen the recent statements by the president and on the other hand, which is a national shame, is the very negligible investment in science and technology.
We rank eighth in this area. That's a national shame. So how can we have much more R&D and to be connected with the productive sector? That's what we need to do as far as exports and re-industrialization. Finally, public finances, were the increase of public expenditure in 2021 generated a deficit. Which is substantial and also of public debt. So that's a huge challenge for this government. Add to that there's a very specific issue, the fund of stabilization of fuel prices, because before there was a policy of not to increase fuel prices.
And then we saw the rise of oil prices in the world. So the biggest challenge in the fiscal area for the government is to complete the fiscal adjustment at the same time that we finance an additional level of social expenditure in order to meet the first priorities, which are the essential priorities of the government, the social policies. And that's the reason for the fiscal reform that we have presented to the Congress of the Republic. As far as the fiscal area, we can see the 2020, 2021 public expenditure was considerable, and there has been some adjustment of the fiscal balance of the government, but it's very insufficient: 5.6 percent of the GDP for servicing of the debt. And this is compared to the fiscal agreement that we need to turn it into a positive trend for next year and 2024. So basically, it's an adjustment of the 2 percent of the GDP that we need to accomplish.
So it is not an easy task. But then we have this other problem: the fund of stabilization of fuel prices. In any event, the 2.7 percent need to add to the 5.6 percent from before, meaning that the challenge that we have ahead of us is over 8 percent in GDP in terms of fiscal deficit, not only for the fiscal rules, this 2.7 that we need to pay next year. So that's part of the next year's budget. As far as debt, we get to 65 percent of the GDP has come down, but it's still over 55 percent of the GDP, which is the goal as fiscal rules associated with the primary adjustment. Just for historical terms when I was a minister before, public debt was 50 percent of the GDP. So meaning the fourth. But these are different times. That was the public debt that I left behind me.
The problem from the fiscal point of view: We can see this chart and the one before it are from the OECD. We have a fiscal structure that's very unusual where personal income generates very little tax. 80 percent of the GDP against 51 percent of the OECD.
And we have a lot of social tax, much higher than the OECD and the VAT. We have a fiscal structure completely atypical. So that's one of the reasons, as you can see in this chart, is that in the areas of higher income, we have two items of income, the ones on top, which are dividends and occasional gains that represent half the income of those very high-income households. So you cannot do a progressive fiscal reform that does not have an impact on occasional gains.
I know that this is rather controversial, but in the discussions that we had with Congress and with many business sectors, we're debating how we can do that. So with Congress and all the different sectors, we’ll be discussing this issue.
These are the main elements of the reform that we have proposed based on the constitutional principles that we have. On equity, progressiveness, and efficiency. This was just to simplify, to say all income are the same, no matter the source.
But that seems that as far as dividends and occasional gains are not so. However, the main elements of the reform are the reduction of tax of low-income people, low-income households. So we're trying to focus on high-income households in order to have an equitable distribution of wealth.
So natural persons. There was a proposal. You know that in this century, we've had taxes on companies or legal entities different from natural individuals. Second, limit business of tax benefits for some sectors. But on the other hand. Perhaps it's a matter of how to improve the contributions in order to export. So in order to fulfill the first goal, which is to diversify our exports. Then we have to improve contributions of the sector of national resources to the financing of the public sector. Basically because this is a sector where we're trying to capture the tax on the exceeding profits of the sector through a tax on exports beyond a certain basic price. And then we have to mitigate environment and health areas. Also to improve when it comes to the carbon situation, and in health, we've had some degree of controversy. And also dividends and occasional gains have been the two issues where we had a lot of controversies. There are many measures to fight evasion of tax evasion measures.
One is precisely trying to get gains by companies that provide digital services from abroad. This is a very important issue currently. So beyond certain levels of clients and sales, those people that do not have residency in the country to charge them a rate.
For instance, there's another measure to establish that the companies cannot replace their fiscal presence for fiscal reasons and they go to paradise tax shelters, because that would be a tax evasion, clearly. And the third is that for executives, basically, all natural individuals have to pay taxes. I mean, there are some people that—I'm not included—I know that some people get irritated by this. I mean all of this is upsetting. Of course it's uncomfortable. But we've been very open to debate.
We have had alternative proposals. Some people may not like some of these measures and they may tell us what can produce more income. Focus on the positive, not the negative. So we would say that we will be able to achieve 25 billion pesos.
So perhaps we can even generate twice as much. And that's associated to a reform with an expansion. But we know that we need to have a much more amicable system with people because there have been many complaints based on the inefficiency and the pressure on businesses. That was the first sector that complaint—for instance, the exporters. They say that if our priorities are exports, how can we not have a good relationship?
So this is our estimate of how much we're thinking of collecting for natural individuals and then followed by oil and coal. We have a small tax on gold, which we will we will eliminate, avoiding gold smuggling, which is very easy to smuggle and then legal entities.
And then what I mentioned about free-trade areas and then other taxes. Thank you very much.