Colombia

Oxford Economic Country Briefings, Sep 25, 2008

Highlights and Key Issues

* The economy is now slowing as domestic demand -which spurred strong rises in manufacturing and construction in 2006 and 2007 - eases. GDP growth slowed to 3.7% in Q2 from 4.5% in Q1 and 8% a year earlier, while H1 growth was 4.1% versus 8.2% in H1 2007. Our forecast for 2008 growth has been lowered to 3.6%.

* High global prices for food and fuel continue to push up inflation. Year-on-year inflation was 5.7% at end-2007 and rose to 7.9% in August, even further above the 2008 target of 3.5-4.5%. The central bank hiked interest rates by 25bp in February and July but left them unchanged in August and September even though the 2009 inflation target of 33.5% appears likely to be overshot.

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

* Political uncertainty remains the keynote 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. But amid opposition tactics and a resurgence of allegations of parapolitics, the petition put in place during August for a referendum on a constitutional reform to enable Uribe to run for a third term in 2010 could be withdrawn.

Overview

Economy slows again in Q2...

* GDP growth is slowing significantly in 2008 after averaging 7% in the past three years. Growth was still robust at 8% in Q4 2007, but eased to 4.5% in Q1 this year, well below 8.5% in Q107. The Q1 result was influenced by the timing of Easter, with fewer working days affecting the annual comparison as well as a 15.4% quarterly drop (and 5.7% fall on the year) in construction. GDP data for Q2 released on 22 September show a further slowdown to 3.7%, yielding H1 2008 growth of 4.1 % (versus 8.2% in H1 2007), as manufacturing grew by just 1.1% (1.6% in H1) with construction at 0.3% (0.5% in H1). The mining sector rose by 7.6% (6.2% in H1), lifted by 9% growth in hydrocarbons.

* Government officials had been working with a 2008 growth projection of 5%, but indicated on 20 August that 4.5% is more realistic, close to the middle of the 3.3-5.3% range projected by the central bank. After the Q2 data, finance minister Oscar Zuluaga cut the forecast to 4%. Our 2008 forecast has now been cut to 3.6%, with 4% seen in 2009. Zuluaga has also indicated some changes will be made to the 2009 (COP140bn) draft budget submitted to Congress at end-July. Plans were previously in hand to reduce the central government budget deficit to 3% of GDP in 2009 from the 3.3% projected outturn this year.

Central bank holds rates at 10%

* The slowdown in growth has come as inflationary pressures continue on the back of high global food and energy prices. In H1 2008, the IPC rose 6% with the annual rate at 7.2%, well above the central bank target range of 3.5-4.5%. At mid-year, the central bank benchmark interest rate stood at the 9.75% level set in February, although at end-May the finance ministry had raised bank deposit requirements on stock and bonds purchases to 50% from 40%.

* In February, the central bank acknowledged a probable overshoot of its 2008 inflation target, but kept the 2009 target of 3-3.5%. Central bank president Jose Dario Uribe indicated on 13 June that the bank would seek to curb inflation, but the key interest rate was left unchanged on 20 June. By the 25 July meeting, this option was 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$23.6bn at end-August). The IPC rose 0.48% in July, lifting the annual rate to 7.5%, but amid signs that the economy was slowing the bank kept rates on hold on 15 August. And after the August IPC rose just 0.2% and 7.9% on the year, the bank again left rates on hold at its 19 September meeting. An easing of food and fuel prices should help the inflation outlook, although the rate will still end the year at over 7% and the 2009 target appears unattainable.

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

Doubts over Uribe third term plans

* President Alvaro Uribe appears to have survived opposition allegations of vote-buying in the 2004 constitutional reform that let him run in 2006 for the second term he is now serving, as well as the challenge to the legality of the elections by the Supreme Court and constitutional court that generated an air of crisis at the start of July. Uribe had offset this by calling for a referendum to approve a re-run of the 2006 election but this did not proceed. Relief also came from the army's dramatic release in July of 15 hostages held by the PARC guerrillas, most notably Ingrid Betancourt, a former presidential candidate who might wish to run in the 2010 election.