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Colombia Country Risk Report Q2 2016

Colombia Country Risk Report Q2 2016

Core Views

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
rates.
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
months.
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

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