Financial crisis cycle: good business for bakers but high cost to society

Government as safeguard of financial sector is a repeated history, since 1977 there have been 4 main crisis in the region (Latin America), the first one was in 1981, then 1991, 1999 and finally 2008, most of them were due to credit defaults. Since the big crisis at the end of 20’s, governments give huge resources to financial sector in order to avoid worst scenarios but at the end unemployment is high and bank’s owners are in the same lucrative strategy, they take society contributions (taxes) to afford their losses.  This note shows how private banks take advantage of financial crisis through higher credits after meltdown in Colombia, they work as following: first default credit comes due to high interest rates and inappropriate debt management, then governments (central banks)  give solvency though huge money packages afforded through taxes and low lending rates through central banks (rates close to zero) but financial institutions charge higher primes to consumer and medium size firms, then interest rate goes up again and crisis come again, finally unemployment is high through whole path. The main conclusion is: what is Basel III doing to avoid this perverse cycle?, does this institution take into account the global unemployment  disease in her accounts?, my impression is it does not. Moreover, Colombia Balance of Payments Crisis is probably coming at the end of the next seven years.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: @Humberto_Bernal

It can be download @ PDF

The last financial crisis as many others brought high private external debt in Colombia as figure 1 shows, after 1981 private no financial institution increased their external debt, same situations were in 1991, 1999 and 2008. This last crisis brought an exponential increase in this type of credit. Before 2008 crisis, private credit showed an average annual growth rate of 5.7% and after 2008 crisis this average was 13.1%, then local firms took advantages to improve their infrastructure and capital due to “low interest rates”  but financial sector model could stop this productive process again. Figure 2 shows the external interest rates moving, for instance LIBOR rate (red line) showed a decline after each crisis, then after couple of years this rate increases to face the following crisis. 

Figure 1. Medium and long term external private debt for no financial institutions in Colombia 1970 - 2012

(US$million)

Source: Central Bank Colombia.

Figure 2. Interest rate charge to private debt and LIBOR* rate

(%)

*LIBOR 6 months.

Source: Central Bank Colombia.

One tends to think that local firms can take external debt at LIBOR rate but it is not the case, Local firms are charged with a prime (Interest rate charged menus LIBOR rate) of 3.23% in 2012, if one calculates this prime since 1995, one concludes that local firms are facing a higher prime as years go, it went from 0.65% in 1995 to 3.23% in 2012. Therefore one can conclude that external financial sector is affording her losses through central banks low interest rates and high lending rates, although these lending rates face a low value compared with interest rates before crisis. This problem is not abroad only, local banks in Colombia are charging high interest rates while Colombia Central Bank decreases her reference lending rate, it is 3.25% in 2013 and lending rate is about 11.94% in 2013!!!. 

The volume of private no financial external credit in Colombia is about US$18.1 million in 2012 that means 4.9% of her GDP in 2012 as figure 3 shows. Although this external credit shows a lower share in GDP, the issue is that Colombia exports depends on mineral commodities and she exports low volume of added value goods, then after 7 years when crude oil finishes, Colombia could face a Balance of Payment Crisis.

Figure 3. Medium and long term external private debt for no financial institutions in Colombia 

1970 - 2012

(Share of GDP %)

Source: Central Bank Colombia.

Banana Republic part IV: Gold production in Colombia in XX century and beginning of XXI century

Global gold production reached 171,300 tonnes through human history, Colombia added 1.1% to this stock but Colombians have not enjoyed this production as it must, Colombia exported 98.7% of her total gold production and there is no productive project from this extraction for Colombians, the main firms that extract gold are from abroad and they work as as enclave economies. This note shows a  summary about gold production in Colombia.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

World gold production is about 171,300 tonnes through human history. Since 1900 to 2012 the World gold production is about 147,000 tonnes (see U.S. Geological Survey) and Colombia gave 1,629 tonnes since beginning of XX century as figure 1 shows, it means 1.1% of total gold production in the World. Nowadays, the main countries that produce gold are China, Australia and the United Sates, the last country has given about 10.0% of total gold stock in the World. Although conquerors did many expeditions to find El Dorado in South America (they though that a secret region in Colombia was full of gold),  there was an unsuccessful expedition. 

Figure 1. Gold production in Colombia, stock since 1917 to 2012

(tonnes)

Source: Minerals UK Archives; Poveda (2005). Historia de Colombia and Central Bank of Colombia.

Colombia has faced three Gold Waves (Gold Rushes) since Colombia independence, Colombia proclaimed independence between 1810-1819 and the first gold wave came in 1860 when most of Latin American countries took economic openness as main target, foreigners thought that Colombia was full of gold but the reality was that Colombia counted with few tonnes of gold but enough to develop industrial projects, this last fact was not developed unfortunately. The main firms came from the United Kingdom, France, Germany and the United States, there were about 75 firms working in gold and silver extraction between 1860 to 1914 in regions called Antioquia, Choco, Cundinamarca and Tolima. Unfortunately, there was few mining firms belonging to local entrepreneurs, one of them was Empresa Minera del Zancudo. This wave finished at the beginning of XX century due to many civil wars through 1880 to 1903; the segregation due separation of Panama and government fines due to wrong decisions against foreign firms.  

The second Gold Wave came in 1923 as figure 2 shows. This wave is due high economic activity in Colombia and Latin America. Through 20‘s, Colombia had the Crude Oil Rush and high foreign investment (it was mainly loans for Real Estate activities, the United States payment of 25 million due to separation of Panama and FDI into crude oil activity), these period is called “The Dance of the Millions”. Colombia enjoyed this Gold Rush until War World II (WWII) when most of foreign capitals were taken to finance the war, of course there were firms extracting gold through war period, at the beginning of 1939 there were 46 mining firms extracting metals and 40 at the end of 1945. 

Figure 2. Gold production waves  1913 to 2011

(Data smoothing)

Source: Minerals UK Archives; Poveda (2005). Historia de Colombia; Central Bank of Colombia and U.S. Geological Survey. Own calculation through data filters. Stata 12.1.

The last Gold Wave started in 1973 and it can be explained by Coal and Nickel extraction, by that time there were discoveries of huge amount of coal and nickel in Colombia, then Colombia was the focal point abroad due to her mining activity, moreover Colombia promoted FDI into these sectors under her new Law (Decree 444 of 1967), since then the local gold production has faced a positive growth. Nowadays Colombia counts with 11 firms that extract gold, most of them are from Canada. 

Colombian gold production is mostly exported, the volume exported reached 98.7% of total gold extracted since 1913 to 2012, it means that Colombia does not produce high added products made of gold. Gold is taken by Colombians to make jewelry and to increase her Central Bank reserves. Gold price has faced a positive trend in the last 10 years as figure 3 shows, this high value can be explained by 2008 crisis, nevertheless its value can be overvalued and its price can go down in the next years, it depends on how World Economic Activity goes.    

Colombia has extracted 1,629 tonnes since beginning of XX century, it can be evaluated in US$89.4 billion in 2012 that means 24.0% of her Gross Domestic Product (GDP) in 2012. The FDI into mining sector since beginning of XX century is accounted in US$24.5 billion in 2011 (23.0% of total FDI as stock in Colombia in 2011), it looks a profitable business which does not give high real value added to Colombians. Government has not broadcasted projects financed by gold firms and the uses of  gold’s royalties, it will great that government promotes firms that uses gold as inputs to produce high added value goods in Colombia, this type of projects will bring unemployment down.

Figure 3. Gold price 1917 - 2012

(Real price base year: 2011, Troy Ounce*)

Troy Ounce = 31.103 grams.
Source:Historical Gold Prices to Present. http://www.kitco.com. Own calculations.

Colombia economic growth for 2013, is this year the beginning of meltdown?

The first quarter of 2013 is gone and Colombia economic activity started with slow speed: for instance high unemployment rate (11.8% in february of 2013), and low consumer expectation through lower expending in 2013 according to broadcast information. Nevertheless, there are indicators that can pull up Colombia economy in 2013, for instance the coffee short and long run programs to improve productivity and the crude oil production, although the last one brings an unfair economic growth, it makes its poor work. Government has to use her spending efficiently to avoid the beginning of Colombia meltdown, the GDP growth rate is forecasted by local and foreign agencies and the average is a 4.0% in 2013 but this average was 4.6% in 2012 and the real figure was 4.0%, then I decided to make my own forecast and the result was a GDP growth rate of 2.5% in 2013 if government does not do anything to reduce unemployment rate and to improve coffee productivity and industrial sector competitiveness. However, under efficiently spending, my best scenario is a GDP growth rate of 3.5% in 2013. 

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: @Humberto_Bernal

It can be download @ PDF

The first quarter of 2013 is gone, local and foreign agencies made their forecast about local economic growth and they are conservative, the average Gross Domestic Product (GDP) growth rate is 4.0% in 2013. I used to take the average of these forecast to make my GDP growth rate forecast but last time theses forecasts were far from the reality, for instance it was expected that Colombia had been growing at 4.6% in 2012 but the real economic growth rate was 4.0% in 2012. Therefore, I decided to make my own forecast and compared with other agencies. The econometric model used was a time series model called VEC where I take into account previous values of GDP in Colombia and USA, Colombian crude oil and coffee production, the local Stock Exchange Index called IGBC and local unemployment rate. Figure 1 shows the observed and forecasted values, one can see that they are well fitted values (the blue line is the observed data and the red line is the forecasted). It is important to highlight that the model takes into account all information from time series, it means trend, cycles and seasonality.

Figure 1. Colombia GDP and its forecast 1977-2013

(quarterly data, Col$billion at 2005 prices)

Source: Bureau of Statistics (DANE and DNP). Own calculations. Stata 12.1.

From this model, the conclusions after many statistical positive tests are: Colombia GDP growth forecast is 2.5% at the end of 2013 if crude oil production increased in 9.0% in 2013, coffee production shows a decline of 24.9%, the local Stock Exchange shows an increase of 7.5%, unemployment rate is 12.7% at the end of 2013 and USA GDP growth rate is 1.1% in 2013. This values can change, of course, through government proper investment in coffee sector (through long and short run productive programs), better young job opportunities for reducing unemployment rate and  exogenous better growth rate from the United States. Table 1 shows both scenarios, the forecasted scenario I (without proper government intervention), this scenario shows the variables values and the growth rates. The scenario II shows the variables growth rates just, under this last scenario (proper government intervention) Colombia GDP forecast is 3.5% at the end of 2013. Therefore if Colombia wants to reach a 3.5% GDP growth rate, she has to invest in order to reduce unemployment, pays attention to coffee and industrial sector through short and long run  productive programs. The bonus  that Colombia can get is an economic growth rate of 2.0% of the United States in 2013. 

Table 1. Colombia economic variables Forecasts at the end of 2013

(under quarterly data since 1977, VEC time sires model)

Variable	Value end of 2013 (scenario I)	Growth I  (scenario I)	Growth II (scenario II)
Crude Oil (Average barrels per day)	1,012,173	9.0%	9.0%
Coffee (Annual sacks of 60kg)	5,617,496	-24.9%	0%
IGBC (Index)	12,133	7.5%	7.5%
Unemployment (Rate %)	12.7%		10.0%
GDP USA (US$billion of 2000)	55,485	1.1%	2.0%
GDP Colombia 2013 (Col$billion of 2005)	484,468	2.5%	3.5%

Source: Bureau of Statistics (DANE and DNP). Own calculations. Stata 12.1.

Forecasted GDP growth rate by local and foreign agencies

As usual, I did the summary of GDP growth rates from main agencies around the World and local ones, in this case I added my forecast. Figure 2 and Table 2 shows the results. The highest forecast is done by DNP (local government agency) with a GDP growth rate of 4.8% in 2013, although they are working with information from june of 2012 (they have to update her forecast), then there are a group of foreign and local agencies that forecast between 4.0% and 4.4% most of them are foreigners and finally the lowest forecast were done by World Bank and me with 3.8% and 2.5% respectively. The main result from this forecast is Colombia will face a similar forecast compared to 2012, the average is a GDP growth rate of 4.0% in 2013 but this forecast shows high probability to be lower due to recent information concerned with decreasing economic growth rate in local industrial sector, although coffee production and crude oil production showed a high production at the beginning of 2013. Finally the region GDP growth rate forecasted is about 3.7% in 2013 and the World GDP growth rate forecasted is 2.9% in 2013.

Figure 2. Colombia GDP growth rate forecasts for 2013

(Foreign and local agencies)

Source: Collecting from agency.

Table 2. GDP growth rate forecast for 2013

(Foreign and local agencies, %)

Agency	World	Latin America	Colombia	Data of publication
DNP			4.8	June 2012
IMF	3.5	3.6	4.4	October 2012 - January 2013
Euromonitor	3.5	4.0	4.3	January 2013
The Economist	2.2	3.6	4.3	April 2013
ANIF			4.0	April 1013
Colombia Central Bank			4.0	March 2013
Fedesarrollo			3.8 - 4.0	January 2013
World Bank	2.4	3.5	3.8	January 2013
Humberto’s			2.5	April 2013
Average	2.9	3.7	4.0	Sample
Standard Deviation	0.7	0.2	0.6	Sample

Source: Collecting from agency.

The Industrial Agenda for Colombia or other Industrial Agenda in Colombia

Many public servants broadcast the positive features of Colombia, they recite those facts learned at secondary school: Colombia is border by two oceans and her global position is unmatched around the World. They also broadcast facts such as  the low salary payment for workers and “good” indicators about the assessment of internal war to improve FDI inflows and economic activity. Nowadays Colombia government is going to set up a New Agenda for Industrial development. I try to point out some issues that this agenda has to deal in order to get a fair industrial development. 1. Work hard to get a country in pace. 2. Locals and foreigners investors have to invest in new projects that add real value to the economy through industrial sector, it is time to finish the foreign investment type of enclave (banana, crude oil, coal, flowers, beer, etc...), Colombia has to look for real development projects. 3. Financial sector (private and public) have to work to develop industrial sector through fair interest rates. 4. It is time to change the management models of Department of Trade and Industry; and exports and FDI promoting agencies, they have to work to improve industrial sector. In this note I work on some of these issues.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: @Humberto_Bernal

It can be download @ PDF

Nowadays the globalization as positive fact is going to everywhere through economic, political and cultural issues. From economic subject, the most important issue is the Free Trade Agreements (FTAs) that take into account zero tariffs, fair labor market, environmental issues and Foreign Direct Investment (FDI) protection. Therefore, there are tools to reach high economic development if countries work hard on it. The last economic globalization (one can count about 3 since1850) started at the end of 1980 decade and Colombia took it at the beginning of 1990’s, since them Colombia has showed short steeps toward fair economic development. This low development can be explained by ignorance about proper uses of globalization tools, internal war conflict that has taken lot of human lives (more than 500 thousand), lot of public resources to fight against terrorism (6% of GDP and not less of 15% of government budget), lack of good government economic decisions and excessive bureaucratic decisions. This note shows the backward motion of industrial sector in Colombia due to above facts. Promptly, this negative motion can be explained by lack of local private and public investment in new project, poor work in promoting local products abroad and average work in attracting FDI inflows for new industrial products. The lack of candid work let getting poor economic growth till point to face a negative grow rates into industrial sector in 2012 when most of countries in the region enjoy a fair economic rates such as Peru, Brazil and Chile.

Lack of investment in local projects

Colombia main economic sectors since beginning of XX century are agriculture and mining sector through sugar, banana and coffee production, extracting activities such coal, gold, emeralds and crude oil are important also as figure 1 shows.  Therefore, Colombia depends on first line products, it is good as society invest the surplus from these activities in added value activities but it is not the case, the surplus from these activities are managed as enclave economy. To argue this point, one can see figure 1, this figure shows the industrial added value as percentage of Gross Domestic Product (GDP) in Colombia. Colombia had a positive trend in industrial percentage between 1925 to 1974, then this percentage started to show a decline till reaching 11.9% in 2012. But it was not lack of proper surplus investment just. There are other issues such as the internal war and lack of government and businessman’s economic projections. Most of public servants started to work in favor of cocaine cartels until point to get a president charged by getting economic resources from cocaine cartels to promoting his presidential campaign in the 90’s. The businessmen who wanted to work under legality were placed aside by terrorist attacks such as bombs, kidnappings, murders and so, then the new businessmen pop up, they worked in the illegality and it brought underdevelopment to Colombia. 

Figure 1. GDP by sector 1925-2012

(%)

Source: Bureau of Statistics Colombia (DANE, DNP) and GRECO (Central Bank of Colombia).

Nowadays, Colombia is starting to get the right path through international help and few local governments work. However, I have to point out a new issue called bureaucracy (corruption) that shows average results to take Colombia to the right economic development deserved. This pool of bureaucrats work in order of their own benefits through high salaries afforded by taxes while people who want to work for social benefit are taken out of the system, it can be called corruption that will bring higher cost in Colombia development. 

This new problem called corruption or average results from government bodies are evidenced through few department chiefs in jail, few mayors of main cities in jail,  lot of bureaucrats who fire good employees without justification and so. These facts are showing results in economic activity, for instance the industrial sector shares in low percentage in economy activity, it was 11.9% of GDP in 2012; the industrial sector missed share in total merchandise exported as figure 2 shows, it went from 42.4% of total merchandise exported in 2001 to 18.7% in 2012; coal, gold and crude oil extraction shares in big percentage in total economy activity, these extractive activities are taken as enclave economies due to most of royalties were taken without economic cost-benefits analysis.

Figure 2. Colombian exports  by sector 1908-2012

(%, just merchandises)

Source: Bureau of Statistics Colombia (DANE, DNP) and GRECO (Central Bank of Colombia).

The  FDI in Colombia, poor promoting agencies work

Most of FDI inflows has came to crude oil and mining sectors since the beginning of XX century (first were mining activities: gold, silver and emeralds, then crude oil and finally coal and ferronickel), the total FDI as stock in mining and crude oil sector reached 47.0% of total FDI as stock in 2012, there was 35% in agriculture, wholesale and retails sales, unfortunately the FDI as stock in industrial sector was 18% in 2012 with a negative trend as figure 3 shows (blue area). Therefore Colombia is not intensive in producing industrial products, this fact is caused by poor infrastructure, lack of economic environment to develop industrial projects (it means high rates of homicide, kidnappings and murders). Moreover the lack of proper FDI promotion pushes down industrial FDI inflows, this fact is due to bureaucracy that characterises FDI and exports promoting government agencies, these agencies do not have a proper program to attract productive FDI into Colombia, for instance people who work abroad have lack of awareness about Colombia development and those who work in local offices in Colombia do not pay attention about industrial activities where foreigners can invest new capital and profits.

Figure 3. FDI as stock by sector 1900-2012

(%)

Source: Bureau of Statistics Colombia (DANE, DNP) and Central Bank of Colombia and literature about FDI in Colombia.

Figure 4 shows the foreign enterprises profits in Colombia at prices of year 2011, from this amount just 30% is reinvested in Colombia and the 70% is taken to source countries. Moreover, most of these profits come from crude oil and mining sector (35-40% of total profits) and this extractive foreign firms take 98% of their profits to their source country, what sad indicator!! for police-makers in Colombia. Moreover, promoting agencies and Department of Trade and Industry in Colombia broadcast the “positive“ achievements on FDI results and the industrial activity but the reality is the other way around: Colombia reached FDI inflows of US$15,822.9 million at current prices in 2012, this amount can be classed as table 1 shows. The poor indicator come from new FDI investment projects into Colombia (other than crude oil and mining extraction), it was US$3,217.6 million!!!, it is too low compared with  other countries in the region. 

Figure 4. FDI profits 1946-2012

(US$million, prices of 2011)

Source: Bureau of Statistics Colombia (DANE, DNP) and Central Bank of Colombia and literature about FDI in Colombia.

Finally, the results from industrial sector both local and foreign enterprises was a negative growth rate of 0.7 in 2012. My opinion, it is time to rethinking the management of Government entities such as Department of Trade and Industry and FDI and export promoting agencies.

Table 1. FDI inflows in Colombia 2012

(US$million, current prices)

Type of FDI	Amount US$ million at current prices
Profits reinvested (not repatriated)*	4,988.8
New projects in crude oil and mining sector	7,616.5
New projects other sectors	3,217.6
Total FDI inflow	15,822.9

Total foreign profits were US$15,888.4 at current prices.

Source: Central Bank of Colombia.