Credit cycle, credit crunch and monetary policy in Colombia

There are 67 financial institutions in Colombia where 22 are banks that have to work hard. Colombia can face a credit crunch (credit squeezed) in 2013 if Central Bank and private banks do not take attention of the credit cycle. Colombian credit cycle reached its peak and it starts the declining path. Solution can be pointed though lowering lending private interest rate and lowering the difference between lending and borrowing rate as it was made in 2009 to sort out the financial crisis. Central Bank can lowering her intervention interest rate as complement, this policy will bring a decline of private lending interest rate in almost same percentage. These  economic policies will keep the GDP growth and the society welfare.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

It can be download @ click

Colombia has 67 financial institutions where 56 are private and 11 are government financial institutions (each one has many branches around Colombia). From these 56 there are 22 private banks where Grupo Aval owns 4 of them, Grupo Antioqueño owns 1 and Grupo Bolivar owns 1. From these 22 private banks there are 11 from abroad and 2 are mixed (local and foreign capital). Profits from these 22 private banks showed a share of 0.72% of GDP in 2011 as figure 1 shows (approximately US$2.5 billions). There has not been a year that private banks face losses. Private banks’s profits shared between 0.6% and 0.7% of GDP between 2004 and 2011 and the difference between lending interest rate and borrowing interest rate showed an average of 6% as figure 2 shows, it means that for each Col$1 that people borrows banks get Col$0.06 and the value of credit in Colombia reached Col$215,305 billion in 2011 (US$120 billion in 2011). 

Figure 1. Colombia private banks’ profits as percentage of GDP 2004 - 2011

(%)

Source: Own calculations and Government finical supervisor (Superintendencia Financiera).

Private banks help to get out of 2009 economic crisis (this crisis was due to 2008 global financial crisis) through lower interest rates that let a lower difference between lending and borrowing interest rates as figure 2 shows. It is right to highlight that private banks make profits in 2008, 2009 and so, therefore they can work with lower difference interest rates and make high profits.

Figure 2. Difference between lending and borrowing interest rate 

2004 - 2012

(%, monthly data)

Source: Own calculations and Central Bank of Colombia.

Nowadays (2012) it appears that private credit reached its cycle peak and the cycle starts its declining path as figure 3 shows. Therefore, Colombia can start a credit crunch (credit squeeze) if financial authorities and private banks do not take the right decisions. 

As in 2009 when Colombia faced the global financial crisis and private banks were aware of making a lower difference between lending rate and borrowing rate, now it is time to repeat the formula to not let a credit squeeze. This policy will bring welfare to everybody due to more credit to customer and high benefits to private banks as it was in 2009. 

Figure 3. Private banks credit cycle in Colombia 2004-2012

(monthly data normalized by maximum value)

Source: Own calculations and Government finical supervisor (Superintendencia Financiera).

Moreover, Colombia Central Bank should be work through lowering her intervention interest rate from 4.25%, this policy can let private banks decline their lending rate and society can keep the welfare. Figure 4 shows the relation between private lending interest rate and Central Bank intervention interest rate, one can conclude that as Central Bank moves her interest rate, then private banks do it in the same direction and in the same percentage. 

Figure 4. Lending interest rate and Central Bank intervention rate 

2004 - 2012

(%, monthly data)

Source: Own calculations, Central Bank of Colombia and Government finical supervisor (Superintendencia.Financiera).

Economic growth, government and guerrilla for a country nicknamed Macondo and called Colombia

Colombia is expected to face a high economic growth of 4.5% in 2012 according to main research centers around the World and local ones. Moreover, there is less uncertainty about her economic growth if one takes the economic growth’s  standard deviation as a measure, while it was 0.3% in May of 2012, now it is 0.2%. However, most of the other countries will face a lower economic growth in 2012 compared with Colombia figure. Although this information is important for colombians welfare, last week started the talks between colombian guerrilla and colombian government, the media broadcast their speeches and the conclusion is really awesome, at first glance appears that both groups did not have any point in common but a deep attention one realizes that they have more in common that it appears. For instance, both groups are working with same economic figures and both want to work in politics for a better place to live. It can sound rare but through my eyes both groups are complement each other, the following fact points out my statement:  while government wants to take the guerrilla out of war conflict, then the guerrilla pretends not want it  and while guerrilla points out the real economic problems of the country, then government pretends to ignore them. This is the country nicknamed Macondo as the Nobel Prize Gabriel Garcia Márquez did it in his book “One Hundred Year of Solitude”.

Autor: Humberto Bernal,

Economista,

e-mail: zhumber@gmail.com

It can be download @ click, better quality recommended

The high economic growth in Macondo for 2012

Colombia has faced 4 economic crisis since 1977, the first one was in 1981 due to local bank crisis; the second one was in 1991 due to economic openness; the third one was in 1999 due to high interest rates on mortgage credits; and the last one was in 2009 due to international financial crisis as figure 1 shows. The last crisis finished at the beginning of 2011, more that one year ago, since then Colombia has faced high rates of economic growth, for instance by 2011 the GDP annual growth was 5.9%. This high rate is due to after the end of the economic crisis, economies face high rate due to the boom of investors and consumers’ expectations. However, this boon will start to slow down slightly due to underutilized resources through the crisis are employed right now and Colombia is on same place before crisis. Figure 1 shows that Colombia is starting the path above of long run GDP trend on the second semester of 2012, it means the economic cycle will be above zero. 

Figure 1. Colombia GDP normalized cycle since 1977 to 2012 

(quarterly data)

Source: Bureau of Statistics Colombia and own calculations.

After 2 years of crisis in Colombia (under long run GDP trend), Colombia faces challenges to improve their productivity and reaches economies of scale, the other way around this global economy will take colombian business out of market. Now is the time to invest in Colombia, those local and foreign entrepreneurs can take advantages of these high expectations in colombian economy, the main targets have to improve manufacture sector through better technologies to be competitive under Free Trade Agreements already signed.

The high expectation in Colombia can be evidenced by different forecast on economic growth. Table 2 shows the World, Latin America and Colombia  forecast for GDP growth. It is expected that Colombia will show a GDP growth of 4.5% in 2012, this forecast is a bit less than before forecast moths before but the uncertainty is less if one compares the standard deviation that reached 0.3% months before and 0.2% this month as table 1 and 2 show. GDP growth forecast for Latin America faced a reduction also, the latest forecast for this region is 3.5% but with less uncertainty. The World economic growth has a forecast of 2.6%, this is less than the forecast months before when it was 3.1%.

Table 1. 2012 GDP growth forecast by different researchers

(%, Mach of 2012)

Source	World	Latin America	Colombia	Observations
Colombian Central Bank			5.1	February 2012
the Economist magazine	2.7	4.2	4.9	March 2012
Fedesarrollo    (Research center)			4.7	December 2011
Euromonitor    (Research center)	3.8	4.0	4.5	December 2011 - March 2012
IMF	3.3	3.6	4.5	September 2011 - January 2012
ANIF                 (Research center)			4.5	January 2012
World Bank	2.5	3.6	4.4	January 2012
DNP            (Government body)			4.0	December 2011
Average	3.1	3.9	4.6	Sample data
Standard deviation	0.6	0.3	0.3	Sample data

Table 2. 2012 GDP growth forecast by different researchers

(%, October of 2012)

Source	World	Latin America	Colombia	Observations
Colombian Central Bank			4.0	July 2012
The Economist magazine	2.2	3.1	4.4	October 2012
Fedesarrollo    (Research center)			4.1	October 2012
Euromonitor    (Research center)	3.4	3.2	4.7	October 2012
IMF	3.3	3.2	4.3	October 2012
ANIF                 (Research center)			4.5	October 2012
World Bank	2.6	3.5	4.7	October 2012
DNP            (Government body)			4.8	June 2012
Average	2.9	3.3	4.5	Sample data
Standard deviation	0.6	0.2	0.2	Sample data

The conclusion is Colombia will growth about 4.5% under information of main research centers in the World and local, moreover the uncertainty is less than that one forecasted at the beginning of year. Latin America will face a lower growth than Colombia, it is 3.5% and the World will face a lower economic growth than Latin America, it is 2.9%, therefore it is time for Colombians take advantages in improving their technology to reach economies of scale.

Talks between Macondian people 

Last week started the talks about the end of colombian armed conflict. The first meeting was in Hurdal (Norway, country where Nobel Prices are given). Both guerrilla and Colombian government gave speeches. The government speech was flat about the economic model in Colombia, of course they do not have to give explications about it to guerrilla but her speech was clear about government targets to reach at the and of this talk, they want a no armed group that participates in politics. On the other hand, colombian guerrilla highlights the economic situation in Colombia. Although they move inside the colombian jungle, they have proper information about colombian economic welfare. Table 3 shows the information given by guerrilla and information taken from government sources. The main conclusion is that both groups are working with same information!!!, there are information that differs marginally but one comes up to same conclusions with both sources: “Colombia faces a strong income inequality and through this environment it will be difficult  to be competitive in a global economy”. 

A foreigner who had read Gabriel Garcia Márquez’s book “One Hundred Year of Solitude” and heard the talks, his main conclusion had be that both groups are complements for getting a better place for their citizens. The following fact hopes making clear my point of view:  while government wants to take the guerrilla out of war conflict, then the guerrilla pretends not want it  and while guerrilla points out the real economic problem of the country, then government pretend to ignore it.

Table 3. Economic environment watched by Colombia guerrilla and Colombia government

Indicator	Guerrilla (FARC) figures	Government figures
Income distribution  ( GINI )	Third worts income distribution by country.	GINI = 0.548 in 2011. 12th place in 2012, scale from worst to better distribution. Source: DNP and World Bank.
Poverty	70% of population, 30 million in poverty and 12 million in extreme poverty.	34.1% of population, 15.7 million in poverty and 4.8 million in extreme poverty. Source: DNP and DANE, they are government bodies.
Unemployment	50% of Labor force divided in unemployment and subemployment.	61.0% of labor force in 2012 is divided in unemployment and subemployment. Source: DANE.
Displaced people	6 million of people.	3,875,987 of people from 1997 to 2011. Source: Acción Social, it is a government body.
Hectares taken for Oil crude extraction	38 million of hectares (33.3% of total hectare in Colombia).	37.8 million of hectares (33.1% of total hectares in Colombia). Source: ANH and Ecopetrol, they are government bodies.
Hectares taken for mining extraction	11 million (9.6% of total hectare in Colombia).	5,428,119 of hectares (4.8% of total hectares in Colombia). Source Department of Mines Colombia.
Hectares taken for livestock (cows)	39.2 million (34.4% of total hectare in Colombia).	29.1 million of hectares in 2011 (25.5% of total hectares in Colombia). Source: DANE.
Hectares taken for agriculture	4.7 million (18.9% of total hectare in Colombia).	2.9 million of hectares in 2011 (2.6% of total hectares in Colombia). Source: DANE.
Land property concentration  (Land GINI)	Land GINI = 0.89.	Land GINI = 0.86 in 2009. Source: United Nations Development Programme.
Main economic groups in Colombia	Sarmiento Angulo; Julio Mario Santo Domingo; Familia Eder; Efromovich; Drummond Ltd.	Manuelita investments (Eder family) with 29 societies in 2011; Ardila Lulle Organization with 27 societies in 2011; Santo Domingo organization with 14 societies in 2011; AVIATUR group with 13 societies in 2011. Source: Superintendencia de Sociedades Colombia. Main private crude oil firms: Pacific Rubiales (23% of production) and OXY (6.6% of production). Main private mining firms: Drummond Ltd, Cerrejón and Cerro Matoso S.A.
Military spending	6.4% GDP, Total spending between US$13 billion and US$15 billion.	2.3% GDP for 2013 (Includes all bodies such as Military Force, Police, Fiscally, and DAS, the last one is in liquidation), total spending US$9.3 billion for 2013. Source: Department of Finance and DNP.
The United States help (Plan Colombia)	US$700 million.	An annual average of US$425.5 million between 1996 to 2012. Source: U.S. Department of State, function 150 & Other International Programs.
Military force (people)	330 thousands.	439.1 thousands (military and police men). Source Department of Defense Colombia.

The cost of working in a country with diseconomies of scale: Colombia case

Colombia as many countries are working to be competitive in a global economy through Free Trade Agreements (FTAs). Nowadays, competition shows products that are high quality differentiated and shows economies of scale (lower average cost as volume of production increases). Unfortunately Colombia has few products with these characteristics (high quality differentiation and economies of scale), therefore many Colombian firms will face a decline in production due to lower prices charged by foreign firms, for instance those from Chine, Korea and so will enjoy colombia demand. Colombians broadcast their high quality in textiles but most of these products show diseconomies of scale such as fibers (ISIC: D-1710) and few of them show economies of scale such as ribbons and laces (ISIC: D-1749). If industrial textiles sectors do not pay attention to this fact, they will face a high cost evaluated throughout getting out of market. To avoid this diseconomies of scale, managers have to invest in research and development according to their product and demand.

Autor: Humberto Bernal,

Economista,

e-mail: zhumber@gmail.com

It can be download @ click, more details.

The industrial revolution came to Colombia by the end of XIX century and beginning of XX century, the first products made in Colombia were beer, textiles and low volume of gas-oil. Since then Colombia has led the production of textiles in latin america but as the global economy increases this place is in doubt. One tends to think that Colombia has an advanced technology to produce textiles but is not true at all. If one works with the textile’s data, one realizes that there are some textiles that show diseconomies of scale and fewer of them show economies of scale. In the first group are Fibers with a ISIC: D-1710 (ISIC: International Standard Industrial Classification), this volume of production of textiles show an annual average increase of 3.3% between 1992 to 2010 as figure 1 shows. Although there has been an increase in the volume of production and the volume of employees per factory (employees increased from 56 in 1992 to 203 in 2010), the technology follows higher cost as volume increased. Figure 2 shows the average product per employee and the volume of employees, the relation between this two variables shows a negative slope, therefore as volume of employees increases, then employees productivity shows a decline. It means a lower average product per employee, this figure shows an average product per employee of 21,236 kg in 2010 when it was approximately 100,000kg in 1999. Therefore those firms which produce textiles of type ISIC: D-1710 will show difficulties to increase their market through Free Trade Agreements.

Figure 1. Product from Spinning of Textile Fibers

diseconomies of scale

 (ISIC: D-1710)

More figure detail in PDF format click 

Source: Bureau of Statistics Colombia (DANE) and own calculations.

On the other hand those textiles that are in ISIC: D-1749 such as ribbons and laces show economies of scale, therefore they can produce at a lower cost as volume of production increases. Nevertheless this transition from diseconomies of scale to economies of scale brought unemployment in this activity. This unemployment is due to fewer people can produce higher volume of production than before of technology faced the change. Figure 3 shows this change for this type of textiles, one realizes that the volume of employment showed a reduction between 1992 to 2010 but the volume increased from 7.6 million of kg in 1992 to 62,4 million of kg in 2009-10, therefore there was a technological advance but the cost was unemployment. However, these textiles have advantages in this global economy due to higher volume of production let getting a lower average cost per kg produced.

Figure 2.  Average product from Spinning of Textile Fibers

diseconomies of scale

 (ISIC: D-1710)

More figure detail in PDF format click 

Source: Bureau of Statistics Colombia (DANE) and own calculations.

In conclution, Colombia has to work hard through these economies of scale and diseconomies of scale due to they can increase the unemployment rate if there is not a proper insertion in this global economy.

Figure 3.  Average product from Textiles (kg)

economies of scale

 (ISIC: D-1749)

More figure detail in PDF format click 

Source: Bureau of Statistics Colombia (DANE) and own calculations.

Bad news after one year of FTA between Colombia-Canada. How to make a real market integration?

The results of exports from Colombia to Canada after one year of signed the FTA are bad. Colombia exported US$614.1 million between august of 2011 and july 2012 where 43.4% was crude oil, we can export this product without FTA. If one takes out this crude oil, the annual growth of exports were negative in 2.2%, it means the FTA between Colombia and Canada has not came with benefits to Colombians. What is the government doing wrong?, one can point two facts: first, government is signing FTAs without targets to improve manufacturing production inclined to export; and the second fact is firms are not investing to reach economies of scale. This note shows two markets (articles of plastics and bakers’ wares) that can get benefits of this FTA if they improve their technology. At the moment, there is trade of these products between Colombia and Canada, if canadians do the first step in improving the technology, they will supply local market and Colombia will face a decreasing of local firms in about 1.000.

Author: Humberto Bernal,

Economist,

e-mail: zhumber@gmail.com

It can be download @ click

Colombia has been signed lot of Free Trade Agreements (FTAs) in the last years. Colombia-Canada FTA is one of most important due to Canada has a population of 35 million and a Gross Domestic Product per capita of US$41,100 under PPP in 2011, therefore this market is so valuable for colombian manufacturing sector. However, it appears that government and manufacturing sector in Colombia just are interesting in signing FTAs and they forgot that Colombia must be ready to be competitive in this global and integrated economy. To point out this fact, Colombia exports to Canada crude oil mainly (approximately 40%-50% of exports to Canada is crude oil), this product adds low value to the economy and we can export it without FTA. Moreover, since august of 2011 when this FTA was signed, exports without crude oil to Canada showed a negative annual growth rate of 2.2% (august to july period), in addition total exports included crude oil to Canada follows a decreasing adjusted seasonal path until point this exports are beneath of its long run trend as figure 1 shows (blue line is beneath red line).  

Figure 1. Exports from Colombia to Canada

2005-2012*

(US$ thousand monthly seasonal adjusted)

Red line: long run trend through Hodrick–Prescott filter.

Blue line: monthly seasonally adjusted data.

Source: Bureau of Statistics ( Superintendencia de Sociedades Colombia), Trademap and own calculations.

How make a market integrated

     i. Articles of plastic case (HS code: 392690)

These negative results for getting a market integrated are due to Colombia government did not think how to insert local manufacturing sector in this FTA. There are lot of firms which can enjoy benefits of Colombia-Canada FTA. For instance, those firms that produce Articles of Plastic  (HS code: 392690)  can enjoy FTA with Canada. 

If one pays attention to the value exported of this product by local firms such those pointed on table 1, one realized that there is a potential demand, of course there are canadian firms which produce this product and they export this product to Colombia also, therefore pops up a market integration. 

Table 1. Market integration: articles of plastic exported to Canada in 2011

(HS code: 392690)

Local firm	FOB exports US$	Share (%)
Plásticos Rimax	239,807	30.7
Ajover	519,699	66.6
Plastinovo	16,942	2.2
I.T.  Hincapie Sportswear	3,116	0.4
Halliburton Latin America	889	0.1
Total	780,453	100.0

Source: Bureau of Statistics ( Superintendencia de Sociedades Colombia), Trademap and own calculations.

Market integration is a processes that requires improving technology in order to generate economies of scale, in other words as the volume of production increases the average cost goes down. Unfortunately there are approximately 388 firms which produce this type of plastics (HS code:392690) in Colombia and they do not show economies of scale as figure 2 shows, we must be aware of it. This figure shows the relation between real income growth and real cost growth (at 2005 prices) for firms that produce this plastic in Colombia. The econometric result is straight, as real cost increases in 1.0% the real income increases in approximately 0.959%, this results shows the use of diseconomies of scale, to say that this market shows economies of scale the real income growth should have been higher than 1.0%. In other words, the fact of articles of plastic is that as volume of production increase, then the average cost increase also. At the moment there are 4 firms and 1 international trading firm (I.T.) which export this product to Canada, if these firms and the other 384 do not pay attention to improving their technology, they will miss the market integration with Canada and they will be out of the market due to there are canadian firms which produce this product at lower cost. 

Figure 2. Articles of plastic: Real income growth and real cost growth for 388 firms between 1995-2011* **

* Real income growth= -0.007 + 0.959(Real cost growth) + error term.
** Data fit by Fix Effects panel data model. Model significative under a significance level of 0.01 and Hausman test for Fix Efects.
Source: Bureau of Statistics ( Superintendencia de Sociedades Colombia), own calculations.

     ii. Bakers’ wares case (HS code; 190590)

Articles of plastic is not the only product that shows a potential market integration, for instance baker’s wares is a product that can be exported to Canada and brings high welfare to colombia society evaluated in jobs and profits. The value exported of this product reached US$98 thousand in 2011 and just 4 firms export high volume of this product to Canada as table 2 shows, of course there are international trading firms from Colombia which export it also. However, there are at least 147 firms in Colombia which produce this bakers’ wares and they do not export this product to Canada. Moreover, there are canadian firms which export this product to Colombia, therefore there is a market integration issue. To sort out this issue in favor of Colombia, those local firms that produce this product must have economies of scale, the other way around these local firms will be out of market. 

Table 2. Market integration: Bakers’wares exported to Canada in 2011

(HS code: 190590)

Local firm	FOB exports US$	Share (%)
North Fresh Colombia Ltda	19,000	19.4
Compañia de Galletas Noel S.A	15,000	15.3
I.T.  Agrofrut S.A.	4,000	4.1
Dalijohn Ltda	4,000	4.1
Productos Alimenticios de la Finca S.A	4,000	4.1
I.T. Laymar Ltda	1,000	1.0
Others	51,000	52.0
Total	98,000	100.0

Source: Bureau of Statistics ( Superintendencia de Sociedades Colombia), Trademap and own calculations.

Bakers’ wares production as articles of plastic shows diseconomies of scale as figure 3 shows. For instance if there is an increasing in real costs of  1.0%, then the real income shows an increase of 0.986%. If there was a economy of scales the real income should have increased in more than 1.0% but it is not the case.

Figure 3. Bakers’ wares: Real income growth and real cost growth for 147 firms between 1995-2011* **

* Real income growth= -0.017 + 0.986(Real cost growth) + error term.

** Data fit by Random Effects panel data model. Model significative under a significance level of 0.01 and Hausman test for Random Effects.

Source: Bureau of Statistics ( Superintendencia de Sociedades Colombia), own calculations.

The conclusion is Colombia is signing lot of FTAs without pay attention to her manufacturing sector technology, most of firms in Colombia have diseconomies of scale and this fact is related to high cost of production under a global economy. Government, private firms, crude oil companies and main industries such as banana and sugar production in Colombia have to invest in different sectors to improve technology, for instance in articles of plastic and bakers’ wares.