Colombia Spat With Venezuela ‘A Blessing’ for Santos

By Helen Murphy

June 24 (Bloomberg) -- Colombia’s trade spat with Venezuela is “a blessing in disguise” that may help President-elect Juan Manuel Santos achieve his goal of quickening economic growth to 6 percent a year, said David Duarte, an analyst at research company 4Cast Inc.

Colombia’s economy expanded faster than expected in the first quarter, the statistics agency said today. Gross domestic product grew 4.4 percent from a year earlier, beating a 3.6 percent median estimate of 24 economists surveyed by Bloomberg.

Santos, who said he wants to mend ties with President Hugo Chavez after being elected by a landslide on June 20, has pledged to reach the 6 percent annual growth target within two years of taking office in August. He plans to do so while creating 2.4 million jobs and expanding the housing, infrastructure and oil and mining industries.

“The trade break was a blessing in disguise,” said Duarte in a phone interview from New York. “Colombia’s growth is now much more organic and domestically based.”

South America’s fourth-largest economy is emerging slower from the global financial crisis than its regional neighbors. The International Monetary Fund estimates GDP will expand 2.2 percent this year, slower than every country except recession- plagued Venezuela. The government on June 15 raised to 3 percent, from 2.5 percent, its 2010 growth forecast.

The yield on Colombia’s local bonds fell to their lowest level since Dec. 1 after today’s GDP report. The yield on the benchmark 11 percent bonds due in July 2020 fell six basis points to 7.88 percent at 12:59 p.m. New York time. The peso rose 0.19 percent to 1892.05 per U.S. dollar.

The slowdown in bilateral trade with Venezuela reduced demand for consumer goods, limiting inflation and allowing policy makers to stimulate the domestic economy by lowering borrowing costs, Duarte said.

‘Warmonger’

Relations have been strained since March 2008 when Santos, as defense minister, ordered a raid into Ecuador that killed Raul Reyes, the second-in-command of the Revolutionary Armed Forces of Colombia, the country’s largest guerrilla group.

Chavez, who has called Santos a “warmonger” and threat to regional peace, ordered troops to Venezuela’s border with Colombia in response to the attack on his ally. He then cut trade ties after President Alvaro Uribe agreed last year to expand U.S. access to seven military bases.

Exports to Venezuela plunged 69 percent in April from the same month a year ago. Before relations soured, Venezuela was Colombia’s biggest export market after the U.S.

Jumpstarting Diplomacy

The peso fell 0.3 percent to 1,895.68 per dollar yesterday. The peso has risen 7.8 percent against the dollar this year, the best performer among seven Latin American currencies tracked by Bloomberg.

“Diplomacy and respect will be the backbone of our international relations,” Santos, 58, said after winning 69 percent of the vote against 28 percent for former Bogota mayor Antanas Mockus. “In conflicting relations there are always two choices: to look back in anger or to open spaces of cooperation for the future.”

The fall in exports to Venezuela was offset by a 98 percent increase in exports last year to the U.S. and a 172 percent jump in exports to China, spurred by a rise in oil export revenue as crude prices recovered.

Santos is likely to reach his growth target even if he fails to restore trade relations with Venezuela, said Alberto Bernal, a fixed income analyst with Bulltick Capital Markets in Miami.

“If Venezuela starts buying from Colombia again we could add another percentage point to the economy, but it’s not the end of the world for Colombia without it,” Bernal said.

Lagging the Region

Bertrand Delgado, a senior economist at Roubini Global Economics LLC in New York, disagrees.

“Without Venezuela, the economy can’t grow more than 4 percent,” said Delgado, adding that a failure to mend ties will cause Colombia to lag behind regional growth for some time. “Colombia is looking for new export markets, but that takes a while.”

Colombia’s economy, after emerging from recession last year, grew 3.4 percent in the fourth quarter, according to a revised year-on-year estimate today using the base year of 2005 instead of 2000.

Policy makers cut interest rates from a record 10 percent in November 2008 to 3 percent now, helping stimulate bank lending and consumer spending.

Colombia’s retail sales rose 7.9 percent in April from a year earlier, while industrial output grew 7.6 percent.

“What motors the economy is household spending, and that’s increasing,” said Julian Cardenas, chief economist at Bogota- based brokerage Corredores Asociados SA. “The economy will lag behind Chile, Brazil and Peru, but that’s because it’s not as open as theirs.”

New Finance Chief

Santos, who has served as finance and trade minister, also plans to lower corporate taxes to attract investment and bring in extra revenue by expanding the tax base. His choice for finance minister, Juan Carlos Echeverry, has said he aims to eliminate by 2014 the consolidated budget deficit that’s equal to about 3.6 percent of GDP this year.

Echeverry also plans to create a dollar-denominated sovereign wealth fund using royalties from oil and coal sales, dividends from state oil company Ecopetrol SA and tax revenue, he said.

The government forecasts foreign direct investment will rise to $10 billion this year, the bulk in mining and energy projects, from $7.2 billion in 2009.

Santos says his plan to increase spending on roads and ports in a bid to slash to single digits an unemployment rate that in April stood at 12.4 percent, the highest in South America.