Colombia’s government finances could face a further battering following a $2.44 billion cut at the beginning of the year.
The country was previously a prime destination for multinational firms looking for a cheap labor force and relatively low-cost manufacturing plants. Following the 1980’s oil boom, the country was a positive option for the Latin American market, as the economies in neighboring Venezuela and Argentina remained unstable with incredibly variable exchange rates.
Since July 2014, the Colombian peso has depreciated by 22.2 percent against the U.S. dollar – a blessing in disguise for firms trading in U.S. currency, but with potentially disastrous consequences for national trading markets and local sales. The devaluation has been principally linked to global crude prices falling fast.
The decidedly sick global oil market has hit Colombia hard. As national oil company Ecopetrol continues to wrack up debts and an almost weekly barrage of mergers and acquisitions from foreign firms no longer able to balance their books, the country’s oil market looks set to go from bad to worse. Furthermore, a decline in the national oil market has had serious repercussions for the country’s job sector, with workers facing cuts or else being part of a smaller workforce under even greater pressure to deliver.
It is also worth noting that for every dollar that oil prices fall, Colombian government loses an average $120 million in revenue. As companies attempt to claw-back, with new plans to boost the national offshore market and elaborate cost-cutting schemes, the golden heyday of the 1980s seems like a distant dream.
It is not just in the oil sector where companies have up and left. Colombia’s manufacturing market has also faced plant closures and downsizing. Mondalez, Bayer and Icollantas-Michelin are just a few of the companies that have closed plants across the country since mid-2014.
According to the World Bank, Colombia is ranked 146 globally for its tax and market rates system. Previously attractive for its low rates, multinationals operating in the country will now have to pay a 75.4% rate on their net income, 23.4% higher than in Mexico. In addition, having Venezuela and Ecuador next door does not aid the country, with changes in government and uncertain political climates affecting company decisions.
So is it really as simple as Colombia is no longer attractive to potential investors? The country seems to have lost its shine, overtaken by Mexico for its attractive economy and growing workforce. Furthermore, the global decline in more “traditional” industries is not only hitting Latin America, as Europe too has seen plant closures and multinationals moving to the more prosperous Asian manufacturing markets, where parts and labor are even cheaper and more readily available.
General Motors closed its Bochum plant in Germany at the end of 2014, the first plant closure in the country since the end of the second world war. Ford Motor Co predicts that 60% of its sales growth will come from Asia during the next five to 10 years. The company expects to see China industry sales hitting 32 million vehicles in 2020, an increase from 23 million in 2013, and set to double to six million in India in the same period. Despite a reported ‘slowdown’ in the Chinese automobile market, the Asia Pacific region continues to attract multinational firms, wiping the floor with its Latin American competition.
Amid predictions that Colombia’s controversial 2015 development plan would lessen the economic woes caused by the global oil crisis, growth has been slow. The country will now have to minimize national spending and tighten its belt to ride out the worst of the currency devaluation, whilst drawing up a contingency plan for what looks set to roll over into 2016 and beyond.