Termobarranquilla. Nonetheless, Colombia’s government spending rose from 11 per cent
of GDP in 1990 to 18 per cent in 2001, resulting in a fiscal deficit of 3.3 per cent of GDP.
Andrés Pastrana, President from 1998 to 2002, tried to take a fresh approach to the
intractable civil war by personally negotiating with both the leftwing guerrillas and the
rightwing paramilitaries, both financed by the drug trade. It was clear at the time that the
problem would be difficult to solve until drug activity was either controlled or eliminat-
ed. Pastrana’s successor, Alvero Uribe, has attempted to shift the emphasis from negotia-
tion to restoring law and order.
In the late 1990s several factors pushed Colombia into a recession. The exchange rate
became overvalued, partly as a result of capital inflows from drug profits, oil exploration pro-
jects and Colombian firms borrowing abroad to take advantage of the country’s investment-
grade rating. Public spending rose from 24 per cent of GDP in 1990 to 36 per cent in 1998
because, among other factors, the central government was required by a new constitution to
increase transfers to local governments, but failed to make corresponding cuts in its own
spending, and the cost of internal conflicts was rising. During the recession property prices
fell and a rising level of nonperforming loans caused several banks to fail. Among the coun-
try’s current structural problems are excessive spending at both the federal and the local level,
an expensive pension system for government and military workers, a costly bank bail-out pro-
gramme and, as a result of the foregoing, a need for higher taxes.
Oil is Colombia’s largest export by value. Coal recently became the second largest, push-
ing coffee back to third. Both the oil and coal businesses are capital-intensive, and largely
dependent on foreign partners. Until the mid-1980s coffee accounted for more than half of
Colombia’s exports, but its leading position has been undermined by low-cost producers in
other countries, including Brazil and Vietnam, which have created a glut in the market.
Many of the recent issues related to the Colombian economy are reflected in the sov-
ereign credit ratings and explanatory comments from the rating agencies. In November
1997 Duff & Phelps (now Fitch) still rated the Republic of Colombia ‘BBB’. Colombia
stood favourably in comparison with other sovereigns in the triple-B category because of
its proven commitment to uninterrupted debt service, its macroeconomic policy mix, which
kept inflation under control, and the favourable trend in its balance of payments, support-
ed by diversification of exports and rising oil revenues. Noting that Colombia’s credit fun-
damentals had recently deteriorated because of slippage in public finances and the ongoing
guerrilla conflict, the agency said that its rating and outlook over the medium term depend-
ed on reducing fiscal imbalances, restoring public order and enacting structural reforms,
such as phasing out the backward indexation of prices, liberalising the labour market,
developing the country’s infrastructure, improving primary education and reforming the
social security system.
Standard & Poor’s cited many similar factors in reaffirming its triple-B-minus foreign
currency sovereign rating in May 1998. Among the constraining factors that it cited were:
- structural flaws in public finances, stemming largely from constitutionally mandated
transfers to local governments (as mentioned above) and a narrow tax base with poor
compliance; - the simmering guerrilla conflict; and
- sluggish progress on lowering inflation, then about 17 per cent, which was de facto evi-
dence of a national preference for growth over price stability.
TERMOEMCALI, COLOMBIA