Colombia’s industrial confidence sank in July, according to a study published on Wednesday by economic think tank Fedesarrollo.
Fedesarrollo’s Industrial Confidence Indicator (ICI) showed almost a 5% drop from June to July, marking a significant decline in commercial trust due to high costs of production, labor, transportation, pending strikes and a likely squeeze in orders throughout the rest of the year.
“The contraction of industrial confidence,” read the study, “is a result of the general deterioration in [stock issuances, volume of orders, and production in the final trimester.]”
But according to the National Association of Financial Research (ANIF), confidence in businesses that compete in the industrial sector is being attacked by deep-rooted macroeconomic factors as well.
Economic Analyst Miguel Ignacio Jimenez of ANIF told Colombia Reports that companies are facing tough competition while trying to manage high energy, labor and transportation costs.
“The reason for the fall in confidence is because companies are continuing to find it difficult to compete.” Even though labor strikes have been the curse for many company’s profit margins this year, manufacturers suffer a different malaise.
“There’ve been strikes in the coffee sector, in the agriculture sector, in the area of education, but there haven’t been any strikes in the industrial sector,” explained Jimenez. However the multinationals that have been entering the country, he said, like French manufacturer Michelin and German pharmaceutical company Bayer, are generating a lot of competition.
The peso is not making things easy for industrials either, said Jimenez. Even though the average exchange rate against the dollar has weakened 2% from 1,798 in 2012 to 1,835 YTD 2013, “the exchange rate continues to be a problem for industrials.”
The Colombian currency weakened in June to a low of 1,940 against the dollar in the wake of a massive sell-off by emerging-markets investors. According to Bloomberg, however, the drop in demand for the peso corrected when fears of US central bank stimulus-easing lessened in early July.
The Colombian Ministry of Finance has said that 1,900 is an ideal exchange rate for the country’s economy.
Finance Minister Mauricio Cardenas has declared that one of his priorities this year is to pull down costs and support Colombia’s fragile manufacturing and industrial sector. A strong wave of foreign investment in the mining, oil and gas sectors during 2012 gave the government royalties for reinvestment in projects like infrastructure. Those investments, in turn, could significantly pull down costs for industrials.
But until manufacturers start to see the effects of these promises, the competition will be hard in Colombia.
- Encuesta de opinión empresarial July 2013 (Fedesarrollo)
- Interview with Analyst Manuel Ignacio Jimenez (ANIF)
- Colombia to wait for peso weaker than 1,900 to sell dollar bonds (Bloomberg)