(Bloomberg) — Before the coronavirus pandemic hit, Colombia was forecast to be Latin America’s top-performing major economy for the second year running. Now it appears headed for its deepest slump since records began in 1905.

With businesses including the national airline Avianca going bankrupt, and widespread hunger as millions lose their jobs, the government of President Ivan Duque is trying to pull off a difficult balancing act: provide enough stimulus to prevent even greater devastation, but without running up so much debt that the nation loses its investment grade credit rating.

That cautious strategy has made Colombia an outlier in South America, with a stimulus package far smaller than that of peers such as Peru and Chile. Some economists are calling for the government to do more.

“We may be erring by being too conservative and gradualist, and implementing a stimulus package that’s too small,” said Juan Carlos Echeverry, who was Finance Minister from 2010 to 2012.

Investors, on the other hand, appear to be welcoming the government’s approach. Since the lockdown started in March, Colombia’s local currency debt has returned 18%, the most in emerging markets.

Gross domestic product grew by a weaker-than-expected 1.1% in the first quarter from a year earlier. Activity expanded strongly in January and February then crashed in March, the national statistics agency said Friday. Earlier this month the Finance Ministry forecast a 5.5% contraction this year, which would be the worst in Colombia’s history.

Oil Crash

The slump in economic activity caused by lockdowns to curb the coronavirus pandemic has been aggravated by a crash in the prices of oil and coal, the nation’s biggest exports.

Flower growers, another major export sector, lost much of the sales boost they normally get from Mothers’ Day, and now risk missing out on the summer wedding season in the U.S. as public events get canceled.

The Duque government is restricted in its ability to provide stimulus by a debt burden of more than 50% of GDP, nearly twice the levels of Peru and Chile. Colombia’s debt is rated one notch above junk, while Peru’s is three notches above and Chile’s is six notches above.

“Colombia has much less fiscal space, and that’s why it’s decided to move gradually,” said Sergio Olarte, an economist at Scotiabank Colpatria SA in Bogota.

The Finance Ministry didn’t reply to an email seeking comment.

Central Bank DNA

The central bank has also been criticized for its cautious approach. When markets were crashing in March, other major central banks in the region cut rates at emergency meetings while Colombia’s was the last to react.

“Monetary policy has been much slower since the DNA of Colombia’s central bank is much more orthodox than other central banks, and they prefer to wait for the data to come out for they act,” Olarte said.

Banco de la Republica has lowered its policy rate by one percentage point since the crisis started, to 3.25%, and is forecast to cut it another quarter percentage point by July.

The central bank has also bought corporate bonds from lenders and lowered bank reserve requirements, among other measures to boost liquidity.

The central bank didn’t reply to an email seeking comment.

“In a crisis of this magnitude, you need to use all the ammunition that’s available,” said Echeverry, who as finance minister used to chair central bank policy meetings. “The central bank may also be erring through and excess of gradualism and timidity.”


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