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On 1 September, the government lifted the
year-old capital restrictions, which had been put in place to curb the
appreciation of the peso. Furthermore, the government has allowed for the
establishment of a derivatives market, which is aimed at helping the country
develop its capital markets fully. On the economic front, growth is likely
to slow compared to last year’s record pace, primarily as a result of a
weaker domestic sector. Meanwhile, the Central Bank is likely to continue to
tighten the reins to stem inflation that is nearing a seven-year high. |
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Industrial
production contracts for second consecutive month
In June,
industrial production contracted 6.5% over the same month last year, which
was down from the 4.2% contraction registered in May (previously reported:
-4.3% year-on-year). The June contraction was broad-based, with 31 of 48
production categories losing ground over the same month the year before.
That said, the main drivers of the June slowdown were strong decelerations
in vehicle manufacturing and petroleum production. As a result of the
weak June reading, industrial production contracted 0.6% annually in the
second quarter, down from the 1.4% expansion registered in the first
quarter. Furthermore, annual average growth in industrial production
continued to decline, plummeting from 5.8% in May to 4.2%, which
represented the slowest pace since February 2006. Consensus Forecast
participants anticipate industrial production to keep the same pace and
expand 4.2% in 2008, which is down 1.0 percentage points from last month’s
forecast. In 2009, the panel expects industrial production to accelerate
to 4.7%.
Government
abolishes capital restrictions
On 1
September, the government lifted the temporary capital restrictions that
it had enacted in May 2007 in order to curb the appreciation of the
peso against the US$. These measures had required foreign investors
to deposit the equivalent of 50% of portfolio investments in the Central
Bank for six months. Owing to the restrictive capital controls, the
Colombian stock exchange has shown a poor performance this year, declining
13.5% between the beginning of the year and the end of August. In an
effort to further develop the country’s capital market, the government
allowed for the trading of derivatives to begin on 1 September.
Meanwhile, the outlook for economic growth appears to be stabilising, as a
strong external sector compensates for continued weakness on the domestic
front. In July, the consumer confidence index (ICC) published by
Fedesarrollo added 10.3 points, from 11.4 in June to 21.7, after
having fallen strongly the previous month. The increase reflected
improving perceptions of both the macroeconomic situation and the personal
situation. Although the index remains above the 0-point threshold that
separates optimism from pessimism, it had deteriorated notably during the
past months amid accelerating inflation, which is eroding consumers’
purchasing power. Moreover, mounting inflationary pressures will likely
force the Central Bank to continue to raise interest rates in the coming
months, which will further worsen prospects for the domestic sector.
Furthermore,
unemployment increased from 11.2% in June to 12.1% in July, which was well
above the 11.2% registered the same month last year.
In
contrast to the developments in the domestic sector, on the external
front, the country is profiting from high commodity prices, which are
likely to continue butressing export growth. In the second quarter,
exports expanded 43.1% annually, up from 41.5% growth in the previous
quarter. Meanwhile, imports added 27.2% (Q1: +20.2% year-on-year). As a
result of strong exports, the country registered the first trade surplus
(US$ 356 million) in three years. Consensus Forecast panellists expect
export growth to moderate from 23.1% last year to 21.0% while imports are
foreseen to decelerate even more (2007: +25.7% 2008: +11.8% yoy),
resulting in a significantly smaller trade deficit for the full year. The
government expects the economy to expand at least 5.0% this year.
Consensus Forecast panellists anticipate economic growth to reach 4.8% in
2008, which is unchanged over last month’s forecast. For 2009, the panel
expects economic growth to moderate to 4.3%.
Inflation
nears seven-year high
In August,
consumer prices added 0.19% over the previous month. The figure was less
than half the 0.48% price rise observed in July, but was broadly in line
with market expectations of a 0.17% increase. The primary drivers of the
monthly price rise were higher prices for housing as well as for
transport. Despite the subdued price increase in August, annual headline
inflation rose from 7.5% in July to 7.9%, which represented the highest
inflation rate in nearly seven years. At the current level, inflation
well exceeds the upper end of the Central Bank’s target range of 3.5% to
4.5%. Nevertheless, on 15 August, before the publication of August
inflation data, monetary authorities decided unanimously to keep the
benchmark interest unchanged at 10.00%. Monetary policy makers cited
declining inflationary expectations after the persistent rate hikes
implemented during the last two years as a reason for their decision. The
Bank has raised interest rates 16 times since April 2006, the last time
hiking the reference rate by 25 basis points on 25 July. The Central Bank
stated that it expects inflation to remain high in the coming months and
then to decline gradually as long as inflation expectations continue to
moderate and salary increases remain moderate. Consensus Forecast
panellists expect inflation to further moderate to 6.8% by the end of this
year, which is up 0.2 percentage points from last month’s estimate. Next
year, panellists anticipate inflation to moderate to 4.9%, which is within
the Central Bank’s target range.
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