Uribe has transformed Colombia’s prospects

May 30, 2008

Uribe has transformed Colombia’s prospects

Colombia’s house prices have risen strongly over the past year, with a 14.21% increase (8.06% real) in prices during 2007. This follows small but positive rises in the 5 previous years – 2003 (2.3%), 2003 (7%), 2004 (9.8%), 2005 8.8%, and 2006 (6.8%).

The star of this is president Uribe, whose successful anti-terrorist campaign has borne fruit and whose economic policies command wide support. The government is competent, technocratic, has restrained budgetary policies, is liberal and pro-market, and has wholly transformed the Colombia’s prospects. Progress since Uribe took power in 2002 has been little short of astonishing.

The economy is enjoying strong growth, which appears to be well-rounded and sustained. Private investment has returned. So too has foreign direct investment (FDI), which has risen from 2.50% of GDP in 2000, to 5.20% of GDP in 2007. Unemployment fell to 9.9% at end-2007, down from 18% at end-2001. Consumer spending rose 7.7% in the first nine months of 2007, and consumer confidence is at all time highs.

The peso is surging

Most telling, perhaps, has been the rapid appreciation of the Colombian peso, which has risen from US$=2800 pesos at the beginning of 2006, to US$=1750 pesos today.

This dramatic increase in the value of Colombian assets has been accompanied by a large increase in international reserves, which have risen threefold since 2000. Colombia’s international debt risk premiums have also fallen to historically low levels.

The current account deficit is relatively low, as a percentage of GDP, and is sustained primarily by capital goods imports, which are supporting present high levels of investment.

Inflation has increased slightly in 2007, to 5.7%, mainly due to supply-side shocks. Responding, the Central Bank raised interest rates from 6% to 9.75% between April 2006 and March 2007, and in 2007 tightened reserve requirements. By December 2007, growth of financial sector loans had fallen from 34.4% p.a., to 24.86%, suggesting that money supply growth is under control.

Uribe’s successful tourism drive

President Uribe has also launched an aggressive tourism drive to show that Colombia is now a safe country for tourists to enjoy the beauty of the Andes and the Amazon basin. Indeed Bogota’s homicide rate has been reduced significantly, and ranks now underneath Washington, Sao Paulo or Atlanta, and tourism destinations such as Rio de Janeiro.

There are also incentives. New hotels built between 2003 and 2018 are exempt from income tax until 2032. Ecotourism has a 20 year income tax exemption.

The drive to boost tourism saw fruitful rewards, with the number of cruise ship arrivals jumping from 42,000 in 2003 to 127,000 in 2007. The aim is to be the 7th fifth destination of choice for tourists in Latin America by 2010 (After Mexico, Brazil, Argentina, Puerto Rico, Chile, and Costa Rica).

Security threats

Uribe’s administration has been successful not only in combating the Revolutionary Armed Forces of Colombia (FARC) and in bringing the leftist national Liberation Army (ELN) to the negotiating table, but also in boring deeply into the operations of the paramilitary Autodefensas Unidas de Colombia (AUC), responsible for many recent kidnappings and murders.

Some 30,000 paramilitaries were demobilizied, and are now testifying about AUC’s operations in exchange for reduced sentences and non-extradition.

However in mid-2007, this investigated implicated seventeen politicians for para-military links. Dubbed ‘para-gate’, the scandal brought up government ties to right wind drug-trafficking paramilitary movements, with fingers being pointed all the way up to the close inner circle around president Uribe.

These developments are hurting the government’s image just as locals and foreigners are starting to believe that Colombia has become safe, especially with impressive improvements like a 73% fall in kidnappings since 2002. Now, there is pressure to assure that the present administration no longer has any connection to the AUC.

The human rights situation remains serious. “As a direct consequence of the longstanding civil conflict, cases of violence, kidnappings, homicide, extra-judicial executions, enforced disappearances, and internal displacement are continuously reported in high numbers,” notes Export Development Canada’s periodic report.

Property prices still below 1995 peak – but not in US$ terms

The fall of house prices after 1995 was largely caused by very high interest rates. In the 1990’s, there were around 320,000 defaults. Banks repossessed 12,000 real estate properties, putting severe strain on the banking system. Today, the banking systerm is once again healthy, with high profitability.

Property prices have not yet reached their 1995-peak level. House prices in Colombia now are still around 36% cheaper than 10 years ago.

Global Property Guide research for Colombia is, alas, very old. When last conducted in September 2005, our research suggested that apartments in Bogota were on the market for an average of US$736 per square meter (sq. m). Present prices would have to be adjusted upward for price appreciation, and for the currency appreciation.

The wonders of Cartagena

The property price index also doesn’t give play to subtle variations. Cartagena prices have risen by much more. The sea-lapped port city (pop. 1 million), founded in 1533, is attractive to both tourists and property buyers for its charm, history, safety, and beaches.

Cartagena was a slave port. Because of its well-protected harbor Cartagena became the staging area for the Spanish treasure fleets. The plundered treasure from Peru and Ecuador was ferried to Panama, loaded onto galleons which then sailed to Cartagena. This was the largest colonial project the Spanish ever undertook in the new world, after Havana, and made Cartagena the wealthiest city in the new world. Many of its citizens would have been multi-millionaires today, and built the beautiful churches and large colonial homes which give the city its charm and beauty.

All this wealth did not escape the attention of Spain’s rivals, and Cartagena was under constant threat of attack. It is now a World Heritage Site for its colonial charm and the old walled city, the Ciudad Amarullada, with tiled roofs, balconies and flower-filled courtyards, which beckon visitors to stroll the narrow streets. But it also a modern city, with vast high rises, and commercial bustle – all located on a superb wide beach. It is also very safe, surrounded by water on three sides and well-policed.

Cartagena hosted the World Tourism Organization's 2007 convention, the travel industry's most important gathering. And the Lonely Planet picked Colombia as one of this year's 10 hot spots.

Even Medellin is beginning to emerge as an attractive city (see excellent IHT article). Once home to drug lord Pablo Escobar’s infamous drug cartel, this city’s beautiful colonial architecture has now been cleaned up, the metro system has been improved, new parks and museums have opened. Open air bars and cafes proliferate to take advantage of the cool, year-round spring-like climate.

Housing deficit

Colombia is still a poor country and most of the population is not well housed. A 2005 survey revealed that 34% of respondents do not live in their own houses, and 79% of these find it unlikely they will ever own one.

The housing deficit amounts to 2.4 million houses. This is about 26% of the entire housing stock. To address the deficit, 185,000 houses must be constructed annually, but in 2006, the housing stock increased only by 96,970.

Owner-occupation is slowly declining from 67.4% in 1988 to about 63% in 2005. At the same time, the share of renters is rising from 24% to 30.6%. This should not be welcomed as good news by landlords because, of the 15 million people living in rented dwellings, about 90% belong to low-income groups.