How would Colombia’s economy feel if its commodities sector suddenly crumbled? Not very well, some economists guess.

Why? Well just take a look at the foreign direct investment figures. According to the latest data from the Banco de la República, the nation’s central bank, Colombia is on track for a record-breaking year, with FDI hitting $11.8bn from January to September last year. This represents an increase of over 12 per cent from the same period last year.

However, so far, about 55 per cent of those inflows have gone into the country’s booming energy and mining sectors.

“On the one hand, it is good that Colombia is being seen as a favourable destination for FDI,” said David Reese, an emerging markets economist and Colombia analyst with Capital Economics in London. “It shows how far the economy has come in building investor confidence.”

“But I have residual concerns about the impact that the inflows are having on the development of the economy,” Reese told beyondbrics, adding that the latest economic data suggest that Colombia might be suffering from Dutch disease. “The FDI is largely destined for the commodities sector.”

Colombia’s president, Juan Manuel Santos, recently said he expects FDI to hit $16bn when the final numbers for 2012 come out.

José Antonio Ocampo, Colombia’s former finance minister and a candidate for the presidency of the World Bank, has also been warning about the possibility of the Dutch disease.

One of the problems, according to Reese, is that the strong FDI inflows, coupled with rising exports derived from natural resource extraction, have led to a strong appreciation of the Colombian peso – which has risen 7 per cent since the start of last year.

This in turn is distorting the development of non-mining and non-energy sectors.

Last year, Colombia’s hit a record high of FDI with $14.5bn. And 61 per cent of that inflow went in to the mining and energy sectors.

“We’ve seen industry struggle for a long time now,” Reese said, adding that now that commodity prices are no longer rising consistently and credit growth had slightly eased back, “we have seen consumer spending slow and we have reached the point of low growth and rate cuts.”

Indeed, the latest GDP numbers from late December have shown an economy that grew just 2.1 per cent in the third quarter compared with the same period last year.

That pace was not only much slower than the 7.5 per cent expansion in the same quarter last year, but also the weakest in three years, in big part dragged down by lethargic manufacturing sector.

“The issue is that with more and more FDI flowing in, these problems of Dutch disease are not likely to go away,” said Reese.

Source: Financial Times

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