In the lush green hills of central Colombia, Daniel Otero, a flower producer, is gloomy. “This is such a beautiful business, I wouldn’t want it to get rotten. We need a devaluation, soon”, he says, smelling a bunch of his roses about to be shipped to the US. “The economy in general is strong – maybe too strong.”

Although Mr Otero’s industry represents a meagre $1.2bn for the Andean country’s economy, it highlights the woes of Colombia’s manufacturers and non-commodity exporters, whose margins are shrinking due to an appreciation of the peso.

Juan Manuel Santos, Colombia’s president, says he understands their concerns but says the agricultural and industrial sectors combined represent only 20 per cent of the country’s gross domestic product.

Energy is far more important. Thanks to the commodities boom, Colombia has been taking advantage of investor interest in the resource-rich parts of the country that were off-limits during the peak of its drug-fuelled, guerrilla and paramilitary violence. Today Colombia is the region’s fourth-largest oil producer by volume and the world’s fourth-largest exporter of coal by volume.

“There are still some things to work on. But the fundamentals are strong,” Mr Santos told the Financial Times.

Since taking office two years ago, the president has set about expanding exports. Recently signed trade agreements with the US, EU, Switzerland and South Korea will be in place by the end of this year. And, after relations with Hugo Chávez’s Venezuela soured during the tenure of his predecessor Álvaro Uribe (Mr Chávez was once reported to have sent tanks to the border), Mr Santos has succeeded in restoring amicable ties. As a result, he believes exports to Venezuela could reach $3bn in 2012.

However, like Brazil, Colombia has been on the receiving end of a wave of money pouring in from the crisis-stricken northern hemisphere as investors seeking returns find Latin America a tempting prospect.

Foreign direct investment to Colombia soared 26 per cent in the first half of the year, reaching $9.3bn in the six months to June as companies piled into oil and mining, according to central bank figures.

This has raised the problem of sustained dollar inflows. The Colombian peso is among the world’s best-performing currencies to date this year, rising more than 9 per cent against the dollar.

“The appreciation is a real problem. Look at Brazil,” says José Antonio Ocampo, Colombia’s former finance minister. “Colombia will have to do something to regulate capital inflows.”

Colombia’s large neighbour has seen spectacular economic growth in recent years, but is expected to expand by only 2 per cent this year as a soaring currency, high costs and competition from cheaper imports send its industrial sector into recession.

Late last month, Colombia’s central bank cut its benchmark lending rate for the first time in two years, by 25 basis points to 5 per cent.

“We are prudent. We are not Brazil. We have been much more disciplined,” said Carlos Caballero Argáez, a former central banker now at the University of Los Andes in Bogotá. “We are not going to hit ourselves against a wall like them.”

The central bank also trimmed its GDP projection for 2012 to 3-5 per cent, compared with growth of nearly 6 per cent last year. But the economy expanded only 4.7 per cent in the first quarter from a year earlier. Growth is likely to slow in the second quarter to between 4.3 per cent and 4.5 per cent, as the global downturn cuts demand.

“Our growth average in recent years has been 4.5 per cent. So, if we end the year there, I’ll be happy,” says Juan Carlos Echeverry, Colombia’s finance minister.

There are indeed reasons to be cheerful. Colombia’s fiscal policy has been extremely prudent and the impressive growth has helped lift 1.2m out of poverty, according to government data.

But, although June data show more than 1m jobs were created year-on-year, Mr Santos has done poorly in recent opinion polls. His weakest front is unemployment, with only 25 per cent of Colombians saying he is doing a good job on the issue.

“We have to be careful about perceptions,” Mr Santos says. “We are working on what needs to be done.”

Source: The Financial Times

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