Colombia: Country Economic Forecast: 15 Sep 2011

Good growth has been sustained after GDP rose 4.3% in 2010. In Q1 this year, GDP was up 5.1% on a year earlier and by 1.9% on the quarter. The central bank expects 2011 growth around the midpoint of a 4.5-6.5% range. Our 2011 forecast is now 4.7%, pending Q2 GDP data at the end of this month. Industry output growth eased in Q2 and this may signal wider slowdown. The central bank raised its key interest rate by 25bp each month in February-July, to 4.5%, as inflation held above the midpoint of the 2-4% target range on higher food and energy prices. Credit growth also added to the strength of domestic demand. But there was a pause in the rate hikes in August while inflation eased to 3.3%. In 2010, the trade surplus fell to about US$2bn from US$2.5bn in 2009 and the current account deficit rose 75% to almost US$9bn. Despite strong export growth and a trade surplus of US$2.2bn in H1, we expect a current account deficit of US$9.6bn this year as imports rise and the services deficit widens. FDI was US$8.6bn in January-July aided by rating upgrades. It remains unclear whether the US Congress will ratify the pending FTA by end September. President Santos has made progress with efforts to curb violence linked to the activities of the FARC and ELN guerrilla groups and emerging criminal gangs. But recent actions by these groups show that threats remain, with Santos taking fresh steps ahead of regional elections due at end-October.