Colombia

Oxford Economic Country Briefings, Aug 29, 2008

Highlights and Key Issues

* GDP grew a revised 8.2% in 2007 after 7.0% in 2006, as domestic demand spurred double-digit rises in manufacturing and construction. This pace has not been sustained this year, with Q1 posting growth of just 4.1% and industrial output falling sharply in Q2 for a rise of just 0.4% for H1.

* Surging global prices for food and fuel have further exacerbated inflationary pressure. Annual inflation was 5.7% at end-2007 and rose to 7.5% in July, even further above the target of 3.5-4.5%. Having left rates on hold since February, but with its credibility under pressure (despite some alternative monetary measures), the central bank hiked rates by 25bp to 10% in July and then left rates on hold on 15 August.

* The external accounts improved during 2008H1 - helped in large measure by higher oil revenues -with a small US$139m trade surplus achieved versus a substantial deficit of US$1.9bn in H1 last year. This reinforces the prospect of a much-reduced current account deficit (at about US$3bn) this year.

* Political uncertainty remains to the fore against a backdrop of fast-changing developments. A challenge to the legality of the 2006 elections that returned President Alvaro Uribe for a second term appears to have been set aside and moves seem to be in hand for a referendum (possibly in H2 2009) on a constitutional reform that would enable Uribe to run again in 2010 if he decides to stand.

Overview

Fresh signs of slowing growth

* GDP growth averaged some 7% during the past three years, with 2007 posting expansion of 8.2%, but the economy is slowing significantly in 2008. While growth was still robust at 8.4% in Q4 2007, the rate eased to 4.1 % in Q1 this year, well below the year-earlier 9.1%. The result was partly influenced by the timing of Easter, with fewer working days affecting the annual comparison, but it also reflected a 15.4% drop on the quarter in construction (for a 5.7% year-on-year decline). Data for May showed a 4.3% fall in industry output (and a 0.4% decline in retail sales), and there was an even sharper decline of just over 6.5% in June, when only 17 of 48 sectors grew. This yielded H1 2008 output growth of 0.37%.

* The government had been working with a growth projection of 5% this year, but indicated on 20 August that 4.5% is now more realistic, close to the middle of the 3.3-5.3% range projected by the central bank. Our 2008 forecast has been cut to 4.2%, with a further easing to 4% in 2009. Plans are in hand to reduce the central government budget deficit to 3% of GDP in 2009 from the 3.3% projected this year. Despite previous indications, next year's COP140bn draft budget submitted to Congress at end-July is well ahead of the COP125bn originally tabled for 2008, with a substantial rise envisaged in the fuel subsidy.

Interest rates held at 10% in August

* Price pressures mounted during H1 2008, with accumulated inflation of 6% and the annual rate reaching 7.2% for June, well above the central bank target range of 3.5-4.5%. At mid-year, the central bank's benchmark interest rate stood at the 9.75% level set in February, although at end-May the finance ministry raised bank deposit requirements on purchases of stocks and bonds to 50% from 40%. Back in February, the central bank revised its 2008 inflation forecast to 4.7% (from 4.3%), acknowledging there would be an overshoot of its target, but retained the 2009 target of 3-3.5%. Despite central bank president Jose Dario Uribe indicating on 13 June that the bank would seek to curb spending growth and stressing the need to keep inflation low via an anticyclical monetary policy, the bank again left its key rate unchanged in June. By the 25 July meeting, this option looked untenable and there was a 25bp rise to 10% as well as a move to the bank buying US$20m daily in the market to boost reserves (US$23.3bn at end-July). Consumer prices rose 0.48% in July, lifting the annual rate to 7.5%, but amid signs that the economy has been slowing further the central bank kept its key rate on hold on 15 August. An easing of food and fuel prices could help the inflation outlook, but a lower target for 2009 looks unrealistic.

* As regards the external accounts, exports in H1 2008 rose to US$19.1 bn (fob) from US$13.4bn a year earlier while imports rose to US$18.9bn (cif) from US$15.3bn, yielding a modest surplus of US$129m versus a hefty US$1.9bn deficit a year earlier. This suggests there could be a further improvement in the current account deficit, which fell to US$1.1 bn in Q1 this year from some US$2bn in Q1 2007 (led by a doubling in oil export revenues to US$2.7bn). We now forecast the 2008 deficit at US$3bn, down from almost US$6bn last year.

Steps under way for Uribe third term

* President Alvaro Uribe appears to have survived opposition allegations of vote-buying in the 2004 constitutional reform that allowed him to run in 2006 for the second term he is now serving, as well as the challenge regarding the legality of the elections by the Supreme Court and constitutional court which temporarily generated an air of crisis at the start of July. Uribe quickly moved to dampen this by calling for a referendum to approve a re-run of the 2006 election but this does not appear to have gone forward.