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Saturday, April 13, 2024

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Colombia

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GDP: USD343.9bn (World ranking 44)
Population: 51.9mn (World ranking 28)
Form of state: Presidential republic
Head of government: Gustavo Petro (President)
Next elections: 2026, Presidential and legislative

Strengths

  • King Natural resource base: agricultural, energy and minerals
  • Strong medium-term growth
  • Pro-business environment
  • Fiscal sustainability principle included in the Constitution
  • Support from international financial nstitutions
  • Independent monetary authorities

Weaknesses

  • Sensitive to commodity price fluctuations and the US business cycle
  • Difficult security situation with long running domestic insurgency and drug trafficking
  • Rule of law and control of corruption remain areas of concern
  • High informality in the job market
  • Skewed income distribution

Economic overview

A strong hit to growth, but a gradual medium-term recovery

Colombia has shown a robust track record of macroeconomic stability and consistent economic growth over the past few decades, achieving a real GDP growth rate of +3.9% in the 2000s and +3.7% in the 2010s. Despite the challenges posed by the pandemic, Colombia rebounded significantly with a +11.0% GDP growth in 2021 following a -7.3% contraction in 2020. However, the exuberant growth observed in 2021- 2022 is giving way to a deceleration in real economic growth. While economic activity pleasantly surprised in 2022 due to strong private consumption driven by pent-up savings and robust bank credit, signs of exhaustion were becoming apparent. Private consumption experienced its first sequential contraction since Q2 2020, household savings are dwindling and real bank credit continues to decelerate from its mid-2022 peak. Anticipated factors, such as the slowdown in the US and global economy, high inflation, tighter global and domestic financial conditions and heightened policy uncertainty, are likely to exert downward pressure on activity in the foreseeable future. Nevertheless, the announcement of a 16% increase in Colombia’s minimum wage for 2023 provided some support. We expect a significant deceleration in real GDP growth to +1.3% in 2023, with an average growth rate of around +3% over the period from 2025 to 2028.

In Colombia, the primary objective of monetary policy is tomaintain a low and stable inflation rate. In 2021, the yearly headline inflation, initially at +3.5%, surged to +11.6% by theend of 2022, with core inflation surpassing +10%. Particularly noteworthy is the food inflation, which reached +24% in February 2023, surpassing levels observed in neighboring regions. This surge is partly attributed to climate-related supply shocks and significantly contributes to the overall ncrease in headline inflation.

In response to these inflationary pressures, the central bank implemented a substantial increase in the policy rate. The rate surged from +1.75% in September 2021 to +13.25% in October 2023. In December 2023, the central bank began a monetary policy easing cycle, bringing the rates down to 13%. Despite this, a slow disinflation process and inflation expectations well above the 3% target are likely to prompt the central bank to continue with a gradual easing cycle. Governor Villar has indicated that the size of the rate cuts ahead will depend on data. Potential factors such as El Niño and discussions around minimum wage present upside risks to inflation. Nevertheless, our expectation is for the central bank to further cut rates in Q1 2024. We anticipate two initial 25 basis points cuts between January and March, aiming to reach a rate of 8.75% by the end of 2024.

Gradual fiscal consolidation, weak external position

Given Colombia’s enduring commitment to fiscal discipline, a commitment maintained by the current Petro government, we anticipate an ongoing emphasis on fiscal consolidation throughout the forecast period. Nevertheless, progress is anticipated to be gradual in the short term. The combination of increased social spending – partially financed by additional revenue from the 2022 tax reform – and the substantial fiscal burden of fuel subsidies is expected to impede a more rapid consolidation. Overall, we anticipate the fiscal deficit to remain relatively wide, averaging 4% over the period from 2024 to 2028.

Colombia faces a significant vulnerability due to its current-account deficit, adding to the pressures of currency depreciation. The trade imbalance is anticipated to expand in 2024, propelled by heightened import growth driven by increased domestic demand, surpassing the growth in exports. Furthermore, the global economic recovery is expected to lead to a more robust increase in workers’ remittances in the year. However, the sustained high levels of profit remittances by firms, particularly in the oil sector, will impede a more substantial reduction in the current-account deficit. As a result, this combination of factors is forecasted to cause the current-account deficit to widen to -4.3% of GDP in 2024 and persist at -4.1% of GDP in 2025. Notwithstanding Colombia’s fairly large current-account deficit, a strong cushion of foreign reserves, Colombia’s FCL with the IMF, continued access to international markets and reasonable levels of foreign direct investment inflows will limit external payments risks.

While we anticipate that the government’s challenges in advancing its statist agenda will lend support to the peso, domestic political turbulence is expected to result in sporadic currency volatility throughout 2024. Nevertheless, we forecast a stronger position of peso in 2024. This projection comes from a narrowing of Colombia’s twin deficits and a weakening of the US dollar.

Still strong business environment, but increasing political risk

Colombia holds the potential for sustained, moderate long- term growth, drawing on its abundant natural resources, a relatively advanced regulatory system for business and stronger institutions and policy frameworks compared to many other Latin American nations. According to the 2022 survey by the Heritage Foundation’s Index of Economic Freedom, Colombia is positioned at 60 out of 177 countries, surpassing both regional and global averages. Noteworthy strengths include favorable scores in tax burden, monetary freedom, trade freedom and investment freedom. However, challenges persist in areas like property rights, judicial effectiveness, government integrity and fiscal health, factors that will continue to influence the overall business climate. In our proprietary Environmental Sustainability Index 2023, Colombia is ranked 7 out of 227 economies. This ranking highlights strengths in areas such as energy use per GDP, CO2 emissions per GDP, water stress and climate change vulnerability.

Gustavo Petro, the left-wing president of the Pacto Histórico coalition, exhibits erratic behavior, blending populist rhetoric with pragmatism in negotiations with opposition and independent legislators as he pursues his agenda. Petro’s inconsistency will challenge the governability of his term, which ends in August 2026. Erosion of Petro’s political capital due to a collapsing legislative alliance in Congress and corruption scandals involving close allies and family members will hinder progress on state-driven reforms. Recent surveys indicate Petro’s popularity has stabilized at 32% in October 2023, suggesting core support remains loyal, reducing the risk of serious social unrest.

 

 

 

 

 

CEOWORLD magazine - Insights - Colombia