Stimulus package looks to construction for economic growth in Colombia

In an effort to counter the negative effects of a slowdown in the mining sector, as well as lower revenues from national oil exports, Colombia is implementing a stimulus package designed to encourage economic growth in the coming years. The Plan for Productivity and Employment (Plan para la Productividad y el Empleo, PIPE 2) comes on the back of an earlier stimulus plan announced in 2013. The success of the package will depend, to a great extent, on how well construction activity can have a ripple effect throughout the rest of the economy.

The new version of the stimulus package, announced in May 2015, is more wide-reaching than its predecessor. The 2013 plan called for an investment of COP5trn ($1.8bn), while the new version anticipates expenditure levels up to as high as COP16.8trn ($6.2bn) over the coming four years. Understandably, not all of these funds amount to new financing, but an anticipation of future spending. President Juan Manuel Santos has announced that Colombia’s tighter fiscal position would require the country to reduce public expenditure by COP6trn ($2.2bn) in 2015, as well as COP17trn ($6.3bn) from the National Development Plan (Plan Nacional de Desarollo, PND), according to a July 2015 report by BBVA Research. Under these circumstances, the PIPE 2 is more about allocating financial resources to where their impact can be greatest, than trying to find new financial sources to increase expenditure.

Maintaining Growth

The higher levels of investment, coupled with the addition of new sectors, such as mining and education infrastructure in the PIPE 2 reflect the weakening of the country’s economic position, demanding a stronger counter-cyclical response. In the 12 months to November 2015, the Colombian peso fell by 30% against the dollar. A steep fall in oil prices, one of the country’s most important export commodities, has also impacted the national budget, while limiting the government’s options.

According to international media reports, every $1 reduction in the international price of oil represents a $200m loss for Colombia’s annual budget. The plan’s stated goal is to reduce the negative impacts caused by lower commodity prices. In December 2015, the Ministry of Finance estimated that the Colombian economy would likely grow by 3.2% in 2015, compared to 4.6% in 2014 . However, the IMF also expects growth to go back up to between 4% and 4.5% per year in the medium term, due to government policy.

Construction

Although it focuses on several different areas and sectors, either by channelling investment or simply by improving certain regulations, the PIPE 2 underlines the strong role that construction can have in maintaining Colombia’s economic growth. This role has been further exemplified by second quarter 2015 figures, which showed the overall economy growing 3%, while the construction sector expanded 8.7% over the same period. Housing projects are one of the focal points of the plan. The PIPE 2 includes several measures for the residential housing sector, aimed at addressing demand across different market segments.

In order to strengthen the ability of middle-income families to buy a home, the PIPE 2 includes 40,000 to 50,000 interest rate subsidies to acquire homes ranging between COP87m ($32,000) and COP215m ($79,120), and will allow beneficiaries to essentially cut between 2% and 3% off their mortgage interest rate. The measure is two-pronged: not only does it encourage families to become homeowners, by reducing the expense of monthly mortgage payments, it also encourages developers to focus on constructing homes that target the middle-class. This has a more direct economic benefit for the construction sector than free housing.

Overall, the PIPE 2 envisions the construction of 60,000 rural dwellings over the coming four years, representing an investment of COP1trn ($368m). About 35,000 of these were already under construction as of June 2015, and were expected to be delivered no later than 2017.

Proven Bet

The government’s decision to allocate money to support housing demand has had positive results in the past. During the previous PIPE programme in 2013, a total of 30,471 housing credits were offered to Colombian families; 7871 in 2013 and 12,600 in 2014, according to figures by BBVA Research. The programme, which subsidised mortgage interest rates by five percentage points, was so successful that by September 2014, the subsidies had been exhausted. However, the success was evident: a government investment of COP400bn ($147.2m) resulted in housing sales reaching COP4.1trn ($1.5bn), according to BBVA Research. The bank anticipates that the current housing programmes could lead to a 1% increase in the construction sector’s GDP in 2015, and as much as 3% in 2016.

Easing The Process

Furthermore, under PIPE 2 a set of measures will be implemented to facilitate the process of school renovations. Firstly, a standard model for new schools was designed, to ease approvals and permits, and the government has the possibility of awarding direct contracts for the projects. Additionally, contracting will be done on a regional basis, through a limited number of contractors, in order to allow them to have economies of scale for executing the projects. The Colombian Chamber of Construction, (Cámara Colombiana de la Construcción, CAMACOL) anticipates that the current projections could significantly increase the educational infrastructure area under construction from the current 304,000 sq metres per year, to 860,842 sq metres per year.

Additional Measures

Other tweaks in legislation or added measures may also impact the construction sector indirectly. One such challenge is the allocation of COP4trn ($1.5bn) to accelerate infrastructure expansion. Although the current infrastructure plans allocate considerable funds towards improving and expanding transport networks, especially to new road development, the economic impacts have been lagging. However, construction of logistics infrastructure will likely help promote economic development beyond the direct impact that construction projects have in the short term. “These logistics projects will also create an economic stimulus for the country and will increase the level of competitiveness of Colombian companies,” Iván Villegas Bermúdez, general manager of Proyecta, a construction company, told OBG.

The construction sector’s role in economic development has become more important with the current reduction in oil and mining earnings. This means that proper implementation of the PIPE 2 programme will be a key determinant of how well Colombia withstands the relative slowdown in its economy.