-Analysis-
BOGOTÁ — The world economy is facing two enormous challenges. One is the pandemic, which can only be confronted by confining the populations of each country for a cautious period and will entail tremendous wealth loss as extreme therapeutic measures are taken. The second is the recent, brutal rupture of the quotas pact in OPEC, the Organization of Petroleum Exporting Countries.
China, South Korea and possibly Italy are stabilizing the contagion and will thus be able to start recovering their previous production levels. The United States and the rest of Europe, meanwhile, must go through the storm of controlling the coronavirus, so difficult to detect, trace and quantify. The underdeveloped world, with its lesser defenses, is awaiting its turn. Everywhere, a pandemic-induced recession is in sight.
In the United States, the private healthcare system makes its population highly vulnerable to the pandemic: 28 million people with no medical insurance, 11 million illegal migrants and 25% of the workforce without access to paid sick leave. This population is a breeding ground for spreading the virus and hampering the ability to fight it effectively. The great nation has become even more vulnerable since the Trump administration cut funding for public heath and medical research centers.
The struggle between Saudi Arabia and Russia for a greater share of the oil market, and Vladimir Putin’s intention of pummeling U.S. producers behind the costly fracking system, were the last straw for the market’s fragile equilibrium, sending prices tumbling from around $65 a barrel to some $30 now. U.S. crude is said to require more than $45 a barrel just to cover production costs.
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Citizens making purchases before returning to lockdown in Cali, Colombia — Photo: Nano Calvo/VM/ZUMA
Colombia is highly exposed to both these crises. Its health system is mostly private, which means a precarious state of health for the large part of the population — approximately 52% — that lives and works in informal conditions. The shantytowns that surround metropolitan zones not only favor viral contagion, they also hinder its detection. We do not have a central command system that would coordinate efforts to fight the pandemic.
Complicating things even more is Colombia’s over-reliance on oil, which constitutes 61% of its exports. The fall in crude prices is depriving the government of some 6.5 trillion pesos (nearly $2 billion) in Ecopetrol dividends and similar sums in reduced taxes. Finance Minister Carrasquilla trusted oil prices would remain stable and cut corporate taxes by 12 trillion pesos this year. Between the two, the public deficit will rise to 2.5% of the GDP and force gigantic public spending cuts on the government.
The public debt exceeds 56% of the GDP and global markets are currently not prepared to risk extending more credit to a government that has been fiddling with deficit figures and fiscal rules. The U.S. dollar is trading at around 4,000 pesos, which will affect inflation seeing as we are more dependent on imports now, especially of food.
The government has no tax savings, furthermore, to make up for the sharp fall in demand being provoked by falling crude prices and rising forex prices. Nor does it have enough fiscal capacity to confront the pandemic should it invade the country with the viciousness it has in poor countries like Iran. Let us hope it does not come crashing our way.
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