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Colombia Country Risk Reports Q2 2015

Colombia Country Risk Reports Q2 2015

Core Views

We believe that Colombia's economy will benefit from solid private consumption in the coming years. That said, with the oil sector set for slower growth as global crude prices plunge, this will prompt larger net exports deficits and weigh on gross fixed capital formation, such that we anticipate slower growth over the next decade than in the last.

Hydrocarbon sector weakness will also weigh on Colombia's balance of payment position. Indeed, faltering oil prices and production will temper investment into Colombia and cool export growth. Meanwhile, slower oil production growth combined with increasing pressure to spend on social programmes will feed through to fiscal slippage toward the latter half of our 10-year forecast period. While the country is well positioned to withstand the storm, with low external debt and a sizeable stock of foreign reserves, the potential for deterioration in the country's macroeconomic buffers will temper investor perception of Colombia's sovereign creditworthiness.

We expect the government and Fuerzas Armadas Revolucionarias de Colombia will reach a peace accord in the coming quarters. However, given the splintered nature of the left-wing insurgent group, such a deal will only slowly improve the security environment.

Major Forecast Changes

We have tempered our optimism on Colombia's growth outlook. Our increasingly cautious view toward the country's oil sector will feed through to the economy in a number of ways:

We are now forecasting 3.9% average real GD P growth between 2015 and 2024, further revised down from our previous 4.2% forecast.

This change reflects our expectation that net exports will become a growing burden on headline growth and that gross fixed capital formation, while benefitting from robust infrastructure expansion, will struggle in the face of sluggish oil output growth.

We have revised down our fiscal deficit projections as the continued plunge in oil prices will weigh on Colombia's budget outlook. We now forecast budgetary shortfalls of 3.0% of GDP in 2015 and 2.9% in 2016, after an estimated fiscal deficit of 2.7% of GD P in 2014.

We have revised down our peso forecasts, from COP2,125/USD to COP2,350/USD for 2015, and from COP2,070/USD to COP2,250/ USD in 2016. This reflects our view that weaker than initially anticipated oil prices will weigh on the COP's performance in the year ahead.


Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Security Challenges To Persist Beyond Peace Deal
The Colombian government will reach a peace deal with the insurgent Fuerzas Armadas Revolucionarias de Colom bia (FARC) during
President Juan Manuel Santos current term in office. While an important first step, the agreement will not fully resolve the myriad
security challenges facing Colombia.
TABLE: POLITICAL OVERVIEW
Table : Poi nts Of Ne gotiatio n Betwe n The FARC and Gover nme nt
Long-Term Political Outlook
Many Structural Challenges Ahead
While Colombia's long-term political outlook is set to remain relatively stable compared with its neighbours, we identify several massive
political challenges for the government over the next decade and highlight three scenarios for change.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
Weaker Oil Sector To Dampen Growth
Real GDP growth in Colombia will face significant headwinds on the back of weak oil production and sharply lower global crude prices
in the coming years. These dynamics will result in lower goods exports, reduced government spending, faltering consumer confidence,
and more limited fixed investment.
Table: Economic Activity
Balance Of Payments
Structural Obstacles To Hinder Manufacturing Sector Revival
Currency depreciation will not be sufficient to revive Colombia's ailing manufacturing sector in the coming years, given the numerous
obstacles to cost competitiveness. Combined with falling oil prices and slower crude production growth, a weak manufacturing sector
will increase pressure on the country's balance of payments dynamics and weigh on real GD P growth.
Table: Curent Account
Monetary Policy
Policy Rate On Hold Through 2015
Colombia's Banco de la República will keep the policy rate on hold at 4.50% through 2015, after hiking by 125 basis points in the past
year. While inflation will remain elevated in the months ahead, slower growth will encourage the bank to maintain a more accom
modative monetary policy stance.
Table: Monetary Policy
Fiscal Policy
Weak Revenues To Widen Fiscal Deficit
Colombia's fiscal deficit will widen in the coming year, as revenues are weighed down by lower oil prices and sluggish production. While
the government has implemented a number of reforms to bolster the tax take, this will not be sufficient to fully offset the impact of lower
oil revenues.
Exchange Rate Policy
COP: Oil Prices Stabilisation To Offer Limited Reprieve
Colombia will face a period of prolonged peso weakness on the back of the country's struggling oil sector, a strong US dollar and
slumping investor confidence in the Andean economy. A stabilisation in global crude prices will prompt a brief rally in the Colombian
peso, but downward pressures will persist over a multi-quarter period.
Table : Exchange Rate
Table: Curency Forecast
Chapter 3: 10-Year Forecast
The Colombian Economy To 2024
Structurally Weaker Growth Following Oil Bust
Substantially lower global crude prices and sluggish oil production growth will curb investment and export growth in Colombia. As a
result, we forecast slower average real GDP growth over the next 10 years than in the previous decade.
Table: Long-Term Macroeconomic Forecasts
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
Table: Operational Risk
Table: Latin America – Availability Of Labour Risk
Table : Labour Force Emplo yme nt By Sector ('000)
Crime Risk
Table : Top 10 Source Cou ntries For Migra nt Wor kers
Table: Latin America – Crime Risk
Table: Crime Statistics
Chapter 5: Key Sectors
Autos
Table : Autos Total Mar ket – Historical Data And Forecasts
Food & Drink
Table : Fo d Consumptio n Indicators – Historical Data & Forecasts
Table : Hot Dri nk Value /Volume Sales , Pro ductio n & Tra de – Historical Data & Forecasts
Table : Mas Grocer y Retail Sales By Format – Historical Data & Forecasts
Global Outlook
New Era For Oil
Chapter 6: BMI Global Assumptions
Table: Global Assumptions
Table : Develope d States , Real GD P GrowtH , %
Table : BMI VERSUS BLOOMBERG CONSENSUS REAL GD P GROWTH FORECASTS, %
Table : Emer ging Mar kets , Real GD P Growt h, %

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