Colombia Country Risk Report Q2 2016
Persistent weakness in benchmark crude oil prices will continueto undermine real export growth and fixed investment, helping tounderpin our view for structurally slower growth over the next severalyears.
We also anticipate a slowdown in real private consumption growthas consumers are hit hard by high inflation, rising interest rates anda significant sell-off in the exchange rate.
Hydrocarbons sector weakness will also weigh on Colombia's balanceof payments position. Faltering oil prices and production willtemper investment into Colombia and cool export growth.
Meanwhile, slower oil production growth combined with increasingpressure to spend on social programmes will feed through to fiscalslippage in the years ahead. While the country is well positioned towithstand the storm, with a relatively low external debt burden anda sizeable stock of foreign reserves, the potential for deterioration inthe country's macroeconomic buffers will temper investor perceptionsof Colombia's sovereign creditworthiness.
The government and Fuerzas Armadas Revolucionarias de Colombiawill reach a peace accord in H116, broadly in line with theirstated timeline. However, given the splintered nature of the left-winginsurgent group, such a deal will only slowly improve the securityenvironment.
Major Forecast Changes
Greater than expected weakness in oil prices has prompted us torevise down our 2016 exchange rate forecast. We now forecastthe unit to average COP3,287/USD in 2016, from COP3,050/USDpreviously, and considerably weaker than the 2015 average ofCOP2,749/USD.
Due to signs that inflation will remain well above the central bank'starget band in 2016, combined with the bank's stated willingness totighten monetary policy, we have revised up our policy rate forecastfor 2016. We expect the bank to raise the benchmark rate by 75basis points to 6.50% by end-2016.
- Executive Summary
- Core Views
- Major Forecast Changes
- Key Risks
- Chapter 1: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Index
- Economic Growth Outlook
- Growth To Remain Subdued As Economy Struggles To Rebalance
- Colombian real GDP growth will remain relatively subdued in the years ahead, as a low oil price environment weighs on fixed
- investment. Real private consumption growth will also ease as the unemployment rate rises and persistent exchange rate weakness and
- high inflation erode consumer purchasing power.
- GDP By Expenditure Outlook
- TABLE: PRIVATE CONSUMPTION FORECASTS
- TABLE: GOVERNMENT CONSUMPTION FORECASTS
- Fiscal And Public Debt Outlook
- Pullback In Spending Will Undermine Long-Term Growth Outlook
- Colombia's fiscal deficit will widen in 2016 as low oil prices and sluggish crude production weigh on revenues. More challenging fiscal
- dynamics will also dampen long-term growth, as government efforts to pare spending in light of weaker revenues reduces investment
- into transport and agriculture.
- TABLE: FIXED INVESTMENT FORECASTS
- TABLE: NET EXPORTS FORECASTS
- Structural Fiscal Position
- External Trade And Investment Outlook
- Worst Is Past For Current Account, But Little Silver Lining
- Colombia's current account deficit will narrow gradually over the next several years, as imports decline further and the primary income
- account shortfall moderates. Nevertheless, with little to drive a strong rebound in exports, the current account shortfall will remain
- structurally wider than in previous years.
- Outlook On External Position
- TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
- Monetary Policy
- Above-Target Inflation Will Keep Policy Rate On The Rise
- Colombia's Banco de la República will tighten monetary policy further in 2016, and to a greater extent than we previously expected.
- Currency weakness and elevated food prices will ensure that inflation remains well above target, forcing the bank to continue hiking
- TABLE: TOP 5 GOODS EXPORTS
- TABLE: TOP 5 GOODS IMPORTS
- Monetary Policy Framework
- Currency Forecast
- COP: Low Oil Prices Will Ensure Further Depreciation
- The Colombian peso will remain under depreciatory pressure in the coming months as persistently low oil prices keep the country's
- terms of trade weak. While the unit will reach a bottom in 2016, persistent headwinds for hydrocarbons exports and investment will see
- the peso remain well structurally weaker in the next few years.
- TABLE: BMI CURRENCY FORECAST
- Chapter 2: 10-Year Forecast
- The Colombian Economy To 2025
- 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 3: Political Outlook
- SWOT Analysis
- BMI Political Risk Index
- Domestic Politics
- Agreement On Reparations Lends Peace Talks Additional Momentum
- The Colombian government's agreement with FARC on war victims' reparations, reached on December 15 2015, is an important step
- towards a final peace deal in 2016. With the parties now having negotiated preliminary accords on two of the most difficult issues –
- transitional justice and victims' reparations – there is significant momentum for a conclusion of the years-long peace talks in the coming
- TABLE: POLITICAL OVERVIEW
- 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
- substantial political challenges for the government over the next decade and highlight three scenarios for change.
- Chapter 4: Operational Risk
- SWOT Analysis
- Operational Risk Index
- Operational Risk
- TABLE: OPERATIONAL RISK
- Trade Procedures And Governance
- TABLE: LATIN AMERICA – TRADE PROCEDURES AND GOVERNANCE RISK
- TABLE: LATIN AMERICA – TRADE PROCEDURES AND GOVERNANCE RISK (CONTINUED)
- TABLE: IMPORT AND EXPORT DOCUMENTS
- TABLE: TRADE PROCEDURES BREAKDOWN
- Vulnerability To Crime
- Chapter 5: BMI Global Macro Outlook
- Global Macro Outlook
- Unfinished Business In 2016
- TABLE: GLOBAL ASSUMPTIONS
- TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
- TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
- TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
- TABLE: COLOMBIA – MACROECONOMIC DATA & FORECASTS