Columbia and Peru set to emerge from crisis, questions linger about Venezuela

Sources:
“On the brink” The Banker
“Fears over Chavez threaten oil auction” Financial Times

Columbia and Peru were not immune from the financial crisis over the past twelve months as Goldman Sachs is forecasting economic growth for Peru at 2 percent this year with Columbia contracting 0.1 percent. From 2003 until last year, Columbia and Peru experienced economic growth of 5.4 percent and 7 percent a year, respectively. Both countries are set to emerge from the crisis with favorable policies for economic growth intact relative to other Latin American countries.

The pre-crisis international commodities boom drove Columbia and Peru’s economic growth. Columbia’s main commodity exports include oil, coal, and gold, whereas Peru’s commodity exports consist mostly of copper, gold, and zinc. However, the commodities boom is only part of the economic growth story of each country. Both countries have pursued stable macroeconomic fiscal policies over the past five years. The president of Columbia’s independent Central Bank, Dario Uribe, stated that the Central Bank’s focus is on macroeconomic stability by “maintaining low and stable inflation and a sustainable exchange rate regime.” Both S&P and Fitch upgraded Peru’s debt to investment grade in 2008, evidencing Peru’s macroeconomic stability. Furthermore, the political environment welcomed foreign direct investment, free trade, and the orderly privatization of industries. The crisis did not disrupt either country’s commitment to stable macroeconomic conditions and both countries look poised to emerge post-crisis as economic leaders in Latin America.

When contrasted with Peruvian and Columbian policies, Venezuelan policies appear to be disrupting future potential economic growth. Like Columbia and Peru, Venezuela’s growth from 2003 to 2008 depended largely on the growing international demand for commodities. The political environment and uncertainty surrounding private investment in Venezuela also increased over the past five years. Venezuela is currently in the process of auctioning off productions rights for an oil field that the country expects to produce upwards of 1.2 million barrels a day. Ordinarily, one would expect the auction of production rights of an oil field this large to draw a large group of bidders. However, foreign investors fear the political environment as well as the unpredictability of the Venezuelan government. Over the past several years, the Venezuelan government, led by Chavez, has taken over numerous private companies including more than 70 oil service companies this year alone. The uncertainty in Venezuela has resulted in reduced interest in the project and has called into question whether the auction will attract enough bidders for Venezuela to move forward with the auction.

Discussion Questions:
1) Will Peru and Columbia’s emergence increase or decrease geopolitical tensions in the region?

2) If Peru and Columbia’s economies experience more robust economic growth than Venezuela, will Venezuela be pushed politically to adopt a less hostile attitude to foreign investment?