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Economy grows
at slowest pace in five years
In the
second quarter, gross domestic product (GDP) expanded 3.7% over the same
period last year. The reading was below the first quarter’s 4.5% figure
(previously reported: +4.1% year-on-year) and also fell short of market
expectations, which had the economy growing 4.4%. In fact, the figure
represented the slowest pace in five years. The slump was due to slower
growth in the domestic sector. Total consumption decelerated from the
3.3% growth tallied in the previous quarter to 2.8%. Growth in investment
fell from 13.1% in the first quarter to 8.4% in the second, the slowest
pace since 2004. As a result, domestic demand added only 4.2% over the
same quarter last year (Q1: +5.7% yoy). The external sector’s
contribution to growth, on the other hand, improved, as export growth
weakened less markedly than imports. Export growth fell from 14.1% in the
first quarter to 11.6%, while imports decelerated slightly more, from
15.4% to 10.5%. As a result, the net contribution of the external sector
remained negative but improved from a 1.8 percentage point detraction in
the first quarter to a 1.0 percentage point detraction in the second. At
the sector level, the first quarter slowdown was mainly due to sluggish
growth in the transport, storage and communications sector, industrial
manufacturing as well as in construction, which expanded a paltry 0.3%. A
quarter-on-quarter analysis, however, does not corroborate the
deceleration suggested by the annual figures, as GDP expanded 0.65% over
the previous quarter in seasonally adjusted terms, up from the first
quarter’s 0.19% contraction
Colombia
to be hit hard by crisis
The
outlook for the short- and medium-term is deteriorating rapidly. In
recent months, the country has been suffering from weakening domestic
demand, which has pushed economic growth to the slowest pace in five years
during the second quarter. In addition, the financial market crisis will
have a severe impact on the economy, as external demand for Colombian
exports wanes and credit will become increasingly scarce. Exports make up
14.5% of gross domestic product (GDP), and, as such, a slowdown in export
growth will affect the overall economy severly. Moreover, more than a
third of the country’s exports are sent to the United States, which is
likely to experience a protracted recession that will reache well into
2009. Finally, falling commodity prices will exacerbate the slowdown in
exports. Prices for oil, which accounts for one quarter of total exports,
have declined 45% since reaching a record US$ 147.27 per barrel in July.
While oil prices rebounded after the announcement of rescue measures on
11/12 October, prices are unlikely to soon reach the high levels seen in
mid-2008 as demand slows on the global economic slowdown. Consequently,
Consensus Forecast panellists expect exports growth to slow from an
estimated 21.7% this year to 6.0% in 2009, which would constitute the
slowest pace since 2002. The financial sector crisis is also likely to
affect the country’s financing costs as global deleveraging reduces the
availability of external financing for emerging economies, including
Colombia. Moreover, the rising aversion among investors will particularly
affect those countries with negative external balances. Although Colombia
has reduced its level of external indebtedness, it has registered seven
consecutive years of current account deficits, which must be financed with
money from abroad. These adverse conditions meet an economy that is
already in the process of slowing down and the latest data suggest that
consumer spending will weaken further in the coming months. In August,
the consumer confidence index (ICC) published by Fedesarrollo fell
3.4 points, to 18.3 from 21.7 in July. The decrease reflected worsening
perceptions regarding both the macroeconomic situation and the personal
situation. Although the index remains above the 0-point threshold that
separates optimism from pessimism, it has deteriorated notably during the
past months amid high inflation, which has eroded consumers’ purchasing
power.
Government
and Central Bank remove restrictions to ensure liquidity
In an
effort to stem the peso’s fall and ensure adequate liquidity in the
market, the government and the Central Bank have lifted various capital
restrictions. On 8 October, President Álvaro Uribe stated that the limits
on foreign investment in fixed income securities would be lifted.
Meanwhile, the Central Bank rescinded restrictions that required 40% of
some overseas financing, such as imports financing, to be deposited for at
least six months in the Central Bank. Despite the measures to assure that
the market has access to liquidity, in the first ten days of October, the
Índice General Bolsa de Valores de Colombia (IGBC) lost
18.9%, as risk-adverse investors embarked on a dramatic flight-to-quality
and moved their money to less risky assets. In addition, the government
has also experienced difficulties with financing the 2009 budget.
Originally, the administration had planned to sell US$ 1.0 billion in
bonds on the international market. Yet, given the flight-to-quality in
the bond market, the Uribe administration has had to enter into
discussions with the World Bank and the Inter-American Development Bank in
order to obtain the necessary credit. Amid the increasing strains on the
economy, the Central Bank recently revised its forecast for 2009 down from
5.0% to 4.0%.
Consensus
Forecast panellists have recently revised their outlook for 2008 downward
to 4.1%, which is 0.7 percentage points below last month’s Consensus. For
next year, the panel is more pessimistic than the Central Bank and has
revised their forecast down 0.5 percentage points to 3.8%.
Inflation
drops unexpectedly
In
September, consumer prices fell 0.19% over the previous month, which
contrasted the 0.19% price rise observed in August and undershot market
expectations of a 0.11% increase. In fact, the reading represented the
largest monthly price drop since 1964. The primary drivers of the
September price decrease were lower prices for food, which fell 1.24% over
the previous month. As a result of the price drop in September, annual
headline inflation fell from 7.9% in August to 7.6%. At the current
level, inflation well exceeds the upper end of the Bank’s target range of
3.5% to 4.5%. Nevertheless, on 19 September, before the publication of
the latest inflation data, monetary authorities decided by a majority to
keep the benchmark interest unchanged at 10.00%. Monetary policy makers
cited improving medium-term inflationary expectations, slower than
expected growth as well as international financial market volatility as
reasons 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. Consensus Forecast panellists expect inflation to
further moderate to 6.8% by the end of this year, which is unchanged from
last month’s estimate. Next year, panellists anticipate inflation to
moderate to 5.1%, which is also above the Central Bank’s target range.
Current
account deficit remains unchanged in second quarter
In the
second quarter, the current account balance incurred a deficit of US$ 1.2
billion, which was below the US$ 1.4 billion deficit registered in the
same quarter the year before, but broadly unchanged over the US$ 1.2
billion deficit registered in the first quarter (previously reported: US$
1.1 billion). The stable figure refelcts an improvement in the trade
balance, which was offset by a larger income balance deficit. In the
second quarter, the trade surplus reached US$ 1.1 billion, up from the US$
443 million surplus in the first quarter. Exports grew 44.3%
year-on-year, while imports added 27.3% annually. In contrast, the
deficit in the income balance increased from US$ 2.3 billion in the first
quarter to US$ 2.9 billion. As result of the second quarter reading, the
moving annual current account deficit shrank from US$ 5.1 billion in the
first quarter to US$ 4.9 billion. Consensus Forecast participants
estimate the current account deficit to widen to US$ 5.9 billion by the
end of the year. Next year, panellists anticipate the current account
deficit to widen even further to US$ 7.8
billion.
Peso
plummets
amid global financial turmoil
In September,
the exchange rate depreciated 12.3% in nominal terms over the previous
month to 2,174.6 pesos to the US$. The September depreciation more
than doubled August’s 6.1% fall and constituted the largest depreciation
of the currency observed in a single month in more than four decades. As
a result of the fall registered in September, the
peso
is now 7.4% weaker than it was a year ago.
Like the
majority of Latin American currencies, the Colombian peso has been
hit by the global financial upheaval caused by the credit crisis in the
United States. As a result, investors have withdrawn funds from emerging
markets across the globe to seek refuge in more stable assets.
Furthermore, by 10 October, the peso had depreciated an additional
3.5% over the end of September, taking the exchange rate to 2,254 pesos
to the US$. The developments in the peso are in constant flux,
and, as such, Consensus Forecast panellists have taken into account the
latest available data and expect
the
exchange rate to reach 2,090 pesos to the US$ by the end of 2008,
which would represent
a 3.6% annual
depreciation. Next year, panellists anticipate the exchange rate to
depreciate 6.7% nominally to reach 2,257 pesos to the US$ by
year-end.
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