COVID-19: Impact on Colombian economic sectors

The private sector should develop and implement risk management practices with contingency plans. Risks in all operations and the supply chain should be understood.

Is the government able to make key decisions and plan for business and financial scenarios?

The report reveals that the consequences of the pandemic include an increased need to support public health services and that, in addition, financial systems will generate significant fiscal pressure.

Colombia is a moderately leveraged economy in terms of indebtedness, which amplifies the shock of the coronavirus, creating more pressure for companies that do not have the cash flow to pay debts.

“One solution is that the debt burden is increased and the immediate negative economic consequences can be temporarily mitigated”

One solution is that the debt burden is increased and immediate negative economic consequences can be temporarily mitigated, “but it will also limit future growth potential as companies take on more debt,” he says.

Impact by economic sector

The report also warns that household consumption and investment was coming out of the woods after years of sluggish growth. However, because of COVID-19, domestic demand for imported products and inputs for manufacturing production in Colombia will be the most affected sectors.

“The financial system will also be impacted -mainly- in fundraising, so it is very likely that banks will tend to raise interest rates in the medium term to compensate for the immediate shock and the search for short-term debt,”the document stresses.

Colombia’s investment slowdown appeared to be bottoming out in early 2020, but the country’s quarantine, coupled with public tension over shortages, could lead to consumption being prioritized over investment. This is likely to cause a shortfall, given the disruptions in supply chains in some regions of the country. The effectiveness of assistance will be critical to mitigate the damage caused by debt defaults, as well as the proposed relief.

What will happen (or is happening) in Colombia?

–Colombia, as a country with a significant share of tourism in national production, will feel the immediate economic shock from global mobility restrictions.

–Aversionand panic behavior leads to lower consumption levels and contributes to the negative impact on the country’s GDP.

– Indebted companies orthosewith weak cash flows, which cannot stay open, cannot employ people or make debt payments will feel the impact in the longer term.

–Asa result of the mandatory precautionary quarantine, national GDP in the second and third quarters of the year will suffer sharply.

– Fiscal pressures on the economy are already tangible duetonational government reliefs such as subsidies, financial tariffs, VAT refunds and general government spending.

–Theeffects on inflation are dual, so that there will be growth via peso depreciation. However, these will be offset by the fall in demand. Despite the measures adopted by the national government, short periods of shortages are expected in some regions of the country, which could slightly increase inflation.

What can be done to mitigate the impact?

The private sector should, from KPMG’s point of view, implement different strategies to lessen the negative effects of COVID-19.

“In that line, it is advised to develop and implement improved risk management practices through the implementation of contingency plans, likewise, seek to understand the key risks in all operations and the supply chain.”

The report indicates that consideration should be given to whether the national government is able to make key decisions quickly and conduct business and financial scenario planning for a rapid recovery, understanding the global and national slowdown and possible recession.

In addition, the impacts this scenario will have on workforce planning and management should be reviewed and assessed, where it is also imperative to work on digital and process automation to mitigate the impact of disruption.

Source: Update