Colombia Country Risk Reports Q2 2015
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
- 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, %