Colombia - Economic Briefing July 2008

Government Anti-Terrorist Forces Free Hostages

One of the country’s elite anti-terrorist units recently freed more than a dozen hostages, among them former presidential candidate Ingrid Betancourt. With the success of this operation and the accompanying surge in popular sentiment, the Uribe administration is increasingly likely to win its bid to hold previous presidential elections again. In the economic arena, on 16 June, the international credit rating agency Moody’s raised the country’s credit rating from Ba2 to Ba1, placing the country just one level beneath investment grade. The upgrade puts Moody’s ranking in line with those of the other two major rating agencies, Fitch’s and S&P. Meanwhile, the inflation outlook continues to deteriorate, as the country suffers the highest price pressures seen in years. On a positive note, price pressures are likely to subside somewhat in the second half of the year.

Economic growth plummets

In the first quarter, gross domestic product (GDP) expanded 4.1% over the same period last year.  The reading more than halved the fourth quarter’s 8.4% figure (previously reported: +8.1% year-on-year) and also fell short of market expectations, which had the economy growing 6.0%.  Furthermore, the figure represented the slowest pace in nearly five years.  The slump was due to slower growth in the domestic and external sectors.  On the domestic side of the economy, consumption decelerated from 5.5% growth tallied in the previous quarter to 3.8%.  Growth in investment fell from 23.0% in the forth quarter to 10.3% in the first, the slowest pace since 2004.  As a result, domestic demand added only 5.4% over the same quarter last year (Q4: +9.5% yoy).  Meanwhile, the external sector also lost dynamism, as export growth weakened from 21.4% in the fourth quarter to 15.0%, while imports decelerated slightly less from 21.2% to 15.9%.  At the sector level, the first quarter slowdown was mainly due to a contraction of 5.7% in the construction sector, which contrasted the 22.9% growth registered in the fourth quarter.  A quarter-on-quarter analysis corroborates the deceleration suggested by the annual figures, as GDP contracted 0.93% over the previous quarter in seasonally adjusted terms, well below the fourth quarter’s 2.47% growth rate. 

Moody’s raises Colombia’s rating

On 19 June, international rating agency Moody’s raised the country’s long-term foreign currency debt rating from Ba2 to Ba1, placing the country one level below investment grade.  In addition, the move put the country on par with countries such as Brazil, and closer to higher-rated Chile and Mexico.  With this change, the country is now positioned only one level below investment grade by all three major international credit agencies.  Moody’s cited an improvement in Colombia's security situation, which has brought about a sustainable recovery in domestic demand, particularly in investment, which, in turn, has helped to improve debt conditions. According to Fitch, another of the three major international rating agencies, the country would have to diversify its trade partners in order to achieve full investment grade status.  Currently, Colombia is actively seeking new markets for its goods, as it has been negotiating a free-trade deal with Canada.  In addition, the approval of the pending free-trade agreement with the United States would help in the consolidation of the trade relationship between the two countries.  However, this agreement is currently stalled in the U.S. Congress and is unlikely to move forward before the presidential elections.  Meanwhile, President Álvaro Uribe has called for a referendum to hold new presidential elections to validate his current term in office, which ends in 2010.  In late June, the Supreme Court sentenced a former member of congress to 47 months house arrest for accepting illegal favours in exchange for supporting the constitutional reforms that permitted Uribe’s reelection in 2006.   Despite the political jitters, the government expects the economy to grow at least 5.0% this year, which would fall well short of the 8.2% expansion registered in 2007 (revised upwards from the 7.5% previously reported as a result of the recent change in the base year).  Underlying next year’s budget planning, the government estimates the economy to grow 5.0% in 2009.  Consensus Forecast panellists anticipate economic growth to reach 5.3% in 2008, which is down 0.1 percentage points from last month’s forecast.  For 2009, the panel does not entirely share the government’s assessment and expects economic growth to moderate to 4.9%.

Inflation reaches five-year high

In June, consumer prices added 0.86% over the previous month.  The figure was below May’s 0.93% reading, but overshot market expectations, which had prices adding 0.49%.  The primary driver of the price increase was higher prices for food, which added 2.02% over the previous month.  Housing prices also rose a strong 0.55% over the previous month, propelled by higher fuel prices, which are included in the housing category.  As a result of the strong price increase observed in June, annual headline inflation rose nearly a full percentage point from 6.4% in May to 7.2%.  The reading represented the highest annual inflation rate in five years.  On 20 June, before the publication of the June inflation data, monetary authorities decided unanimously to keep the benchmark interest rate unchanged at 9.75%.  The Bank has raised interest rates 15 times since April 2006, last lifting rates by 25 basis points on 22 February.  At the current level, inflation has exceeded the upper end of the Bank’s target range of 3.5% to 4.5% since December 2006 by an ever increasing margin.  However, monetary authorities expect domestic demand to decelerate, which should help to relieve inflationary pressures.  Consensus Forecast panellists expect inflation to further moderate to 5.9% by the end of this year, which is 0.5 percentage points up from last month’s estimate.  Next year, panellists anticipate inflation to moderate to 4.7%, which is still above the Central Bank’s target range.

Current account deficit broadly unchanged

In the first quarter, the current account balance incurred a deficit of US$ 1.1 billion.  The figure is less than the US$ 2.0 billion deficit registered in the same quarter the year before, but unchanged over the US$ 1.1 billion deficit registered in the previous quarter.  The stable figure represents improvements in the trade and services balances, which were offset by a decrease in net transfers.  In the first quarter, the trade surplus reached US$ 432 million, slightly up from the US$ 388 million surplus in the fourth quarter.  Exports grew 41.8% year-on-year, while imports added 19.5% annually.  In addition, the services deficit also improved over the previous quarter.  However, net transfers fell from US$ 1.6 billion in the fourth quarter to US$ 1.3 billion.  As result of the in the first quarter reading, the moving annual current account deficit fell from US$ 5.9 billion in the fourth quarter to US$ 5.0 billion.  Consensus Forecast participants estimate the current account deficit to widen to US$ 7.3 billion in 2008.  Next year, panellists anticipate the current account deficit to be broadly unchanged at US$ 7.4 billion.

Peso falls on change in Central Bank’s foreign exchange policy

In June, the currency depreciated 4.19% in nominal terms to 1,833 pesos to the US$.  The reading contrasted May’s 1.38% monthly appreciation and constituted the largest depreciation of the currency observed in a single month since August 2007. The figure broke with the upward trend in place since June 2006, when the currency was trading at 2,633 pesos to the US$.  Despite the depreciation observed in June, the peso is still 6.8% stronger than a year ago, which was below the 9.9% annual appreciation recorded in May.  The currency lost ground against the US$ as a result of a 20 June announcement by Central Bank authorities that the Bank would change its currency purchasing policy.  Monetary authorities now are able to purchase US$ 20 million worth of pesos at auction daily.  Previously, the Central Bank sold US$ 150 million of put options monthly.  The policy change exerts downward pressure on the peso, although it also carries inflationary risks, as the depreciation makes imported goods more expensive. Consensus Forecast panellists expect the exchange rate to reach 1,893 pesos to the US$ by the end of 2008, which would represent a 5.8% annual appreciation.  Next year, panellists anticipate the exchange rate to depreciate 5.7% nominally to reach 2,006 pesos to the US$ by year-end.