Colombia Overtakes Argentina As Latin America’s Third Largest Economy

Colombia has overtaken Argentina to become Latin America’s third largest economy after Brazil and Mexico, according to London-based financial analytics firm Capital Economics. Analysts say this was expected as Argentina is reeling from depreciating currency and high inflation.

Colombia’s economy, on the other hand, is growing at a faster pace than last year. According to Colombia’s statistics agency, DANE, GDP grew 6.4% in the first financial quarter. This was the strongest first-quarter growth since 2007.

The key driver of this growth, according to analysts, is the construction sector, where investment is rising at a rapid pace. The Andean country has now embarked on a $50 billion program to overhaul its transport infrastructure. This project alone is expected to add as much as 1.5% to economic growth during construction.

While Colombia is enjoying low inflation (averaged 2.19% last year), it remains a big headache for Argentina. After the U.S. supreme court refused to hear a lower court verdict that it pay back the money it owed to the so-called vulture funds, Argentina’s capital markets have become extremely volatile.

Argentina’s biggest problem is its weakening currency and declining foreign investment.

Earlier this year, Argentina announced a plan to tax goods purchased through foreign online retailers like Amazon. Later it imposed a US$2,000 limit on the purchase of US.. dollars. Such measures did not protect its currency from falling further.

Increasing imports is likely to push inflation to 30% by the end of this year, leading the currency to devalue by another 50%. With the country’s key commodities — wheat and soybeans — declining in price, Argentina seems set to deal with a larger problem.

A recent Reuters report stated that the peso was being traded on the black market at a discount of more than 40% on the tightly controlled official exchange rate. This is a a major headache for Argentina, where inflation has already gone through the roof.

Capital Economics says oil-rich Venezuela may cede its position as Latin America’s fifth biggest economy to Chile, which has been  investing huge sums of money in overhauling its infrastructure after Michelle Bachelet recently became president for the second time.

If Venezuela fails to whip its economy back into shape, Peru may also overtake it in the rankings in the months to come.