Download Colombia : Macro rebalancing and key political milestones

Colombia
Macro rebalancing and key political milestones
Since 2014 Colombia has been in the frontline of the strong external shock resulting from the collapse of global commodity prices,
notably for oil. Its macro fundamentals deteriorated markedly up to early 2016 (i.e. a widening of twin deficits, a sharp depreciation
of the Colombian peso and a surge in inflation), but economic growth has remained decent, driven by consumption. The macro
rebalancing is not over and should continue in the coming quarters. Meanwhile, two key political achievements occurred in late
2016: the signing of the peace agreement with FARC, and the adoption of fiscal reform. These elements pave the way for brighter
medium-term macro prospects, while economic growth should remain lacklustre in the short term.
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Macro adjustment and rebalancing
From 2003 to 2013, strong economic growth was fuelled by high
commodity prices. Colombia faced the risk of the so-called “Dutch
disease” with commodities accounting for a growing share of the
economy and the peso appreciating at the expense of other exports’
competitiveness. Since 2014 the country has been undergoing a
major adjustment due to the strong headwinds resulting from low
commodity prices, mainly for oil. The peso (COP) experienced one of
the world’s sharpest depreciations against the US dollar in 2015
before appreciating by 5% in 2016.
Real GDP growth slowed to a still-decent rate of 2.0% in 2016, its
lowest level since 2009, driven by a sharp contraction in investment
(-4.5%). Private consumption was the main contributor to economic
growth. But it lost some steam, increasing by only 2.0% compared
with almost 5% on average from 2011-15. Labour market conditions
have deteriorated, while monetary policy tightening in order to curb
inflation prevented credit from rising at an annual double-digit pace
as it had from 2010-2015. A slight fall in exports (-0.9%) was offset
by a steep decline in imports (-6.1%), leading to a positive
contribution to GDP growth from external trade. The oil and mining
industry faced strong headwinds. The sector’s output fell by 6.5% in
2016, driven down by hydrocarbons: oil output dropped by 12% last
year, to 885k barrels/day. Meanwhile, manufacturing, construction
and services performed rather well and agricultural output was
broadly stable.
The current account deficit (CAD) ballooned to a three-decade high
in 2015 (6.4% of GDP), notably as nominal GDP in US dollar terms
was trimmed by the sharp depreciation of the peso. But since then, it
has been narrowing thanks to mild growth in domestic demand and a
slight recovery in commodity prices. Oil and petroleum products fell
to 35% of total exports in 2016 from 55% in 2013. The CAD is not
covered by net foreign direct investments (FDI), which used to be
dynamic over the past decade. Nevertheless, other capital flows
have continued to fill the external financing gap. From 2013-2016,
external debt climbed 17 points of GDP to over 45% of GDP, which
is not alarming but needs to be monitored. Finally, the country has
succeeded in preserving its external liquidity position with foreign
exchange reserves remaining broadly stable and at comfortable
levels over the past three years.
Since 2010, the targeted inflation rate has been 3%, with a
fluctuation range of +/-1pp. Until January 2015, inflation was
maintained under the 4% upper limit. Since then it has accelerated
dramatically, peaking at 9% in July 2016 driven by the sharp
depreciation of the USD/COP and the intensity of the El Niño
phenomenon that has spurred rising food prices. The central bank
economic-research.bnpparibas.com
1- Forecasts
2015
2016e 2017e 2018e
Real GDP grow th (%)
3.1
2.0
2.0
Inflation (CPI, y ear av erage, %)
5.0
7.1
5.5
2.5
4.0
Fiscal balance / GDP (%)
-3.1
-3.8
-3.4
-3.0
Gross public debt / GDP (%)
45.1
43.7
44.9
45.7
Current account balance / GDP (%)
-6.4
-4.3
-4.0
-3.7
Ex ternal debt / GDP (%)
42.0
45.4
47.0
48.0
Forex reserv es (USD bn)
46
47
47
46
Forex reserv es, in months of imports
8.7
9.5
8.9
8.0
Ex change rate USD/COP (y ear end)
3174
3000
3000
e: BNP Paribas Group Economic Research estimates and forecasts
3150
2- Economic Monitor Indicator (ISE)
y-o-y % change
— Gross ▬ Seasonally adjusted
10
8
6
4
2
0
-2
2001 2003 2005
Sources: DANE, Macrobond
2007
2009
2011
2013
2015
2017
initiated a monetary tightening cycle in April 2014 at a time when the
economy still performed well, and inflation started gaining
momentum. After a one-year pause, the intervention rate rose from
4.25% in September 2015 to 7.75% in August 2016. The relative
stability of the FX rate, the base effect on food prices, below-trend
GDP growth and still accommodative international monetary
conditions have favoured a disinflation trend (headline CPI was 4.7%
y/y in March 2017). In this context, the policy rate has been cut by
75 basis points (bps) since end 2016.
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Key political achievements
President Santos (2010-2018) succeeded in delivering on two of his
main promises: the long-awaited peace agreement with the FARC
guerrillas and fiscal reform were finally adopted in the final months of
Colombia
2nd quarter 2017
11
2016. The peace process is not over yet and its disarmament phase
will take longer than expected. But after five decades of conflict and
four years of negotiations, it represents a decisive step towards
further improvement in the country’s institutions, security and
business climate. Nevertheless, in the short/medium term, peace
may prove to be costly (re-integration of former rebels in civil life,
reparations paid to victims, investment programmes for
infrastructure). All these elements have reinforced the need for
approval of the fiscal reform in December (see below).
3- Main macro indicators
- - - Budget balance (% of GDP) ▬ Current account balance (% of GDP)
▬ Headline inflation (%, y/y)
▬ Nominal FX rate USD/COP (rhs)
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These positive elements did not prevent the fiscal gap from widening
even further in 2016. Central government debt/GDP has increased
by 10 percentage points since 2012 to 42%. About ¾ of the stock of
central government debt was denominated in local currency from
2010 to 2014. Nevertheless, half of the 2015-2016 public deficits
were financed by foreign borrowing in the wake of the tightening of
monetary policy. Against the backdrop of huge social, security and
infrastructure needs, the fall in oil-related revenues and potentially
huge costs associated with the peace process, the investment grade
status of the sovereign was called into question. The implementation
of a comprehensive tax reform was critical to respect the fiscal rule
and safeguard Colombia’s reputation for fiscal rectitude and
orthodoxy. Adopted in December, the already-postponed fiscal
reform includes i/ a three-percent increase in the VAT tax rate to
19%, ii/ a gradual decline in the corporate tax rate to 33% from 39%,
iii/ a reduction in the imposition threshold for personal income tax
and iv/ further efforts to reduce tax evasion, loopholes and
exemptions. The government expects the reform to generate
additional revenues amounting to 0.7% of GDP this year and up to
2.5% of GDP by 2020.
Finally, the risk of a downgrade of the sovereign rating to junk status
has receded, at least until the general elections slated for the spring
of 2018 have been held. Five-year CDS premiums on Eurobonds
have declined by 190 bps to 137 bps since November 2015, while
yields on five-year local bonds have fallen by 200 bps to 6%.
economic-research.bnpparibas.com
4
2500
2
2000
0
-2
1500
-4
1000
-6
500
-8
-10
Investment grade status safeguarded
Colombia benefits from its very good track record in terms of
budgetary policy and debt repayment obligations. But the gloomy
global commodity market and lower economic growth at home have
taken their toll on fiscal performance. Nonetheless, the government
succeeded in increasing non-oil revenue (through its efforts to tame
tax evasion and improve tax collection) and implementing spending
cuts/postponements as part of its “clever austerity” policy launched in
2014 to favour spending that promotes long-term growth (education,
infrastructure, etc.). In January 2016, the government sold its
majority stake in power generator Isagen SA to a Canadian
investment fund for USD 2 bn.
3000
6
In the end, even if the conflict with FARC is over, national security
will remain an issue. The government has initiated preliminary talks
with ELN, the second largest Marxist guerrilla group, but they seem
far from reaching an agreement and attacks on oil pipelines have not
ended. In addition, rightist militias remain numerous in the country.
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3500
8
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Sources: Central bank, DANE, BNP Paribas
■
Outlook: better fundamentals but still lacklustre GDP
growth
The macro rebalancing is likely to continue in the coming quarters.
Given its dependence on the US for its exports and capital inflows,
Colombia is exposed to the new US administration’s swerve towards
protectionist policies. But the narrowing of the current account deficit
should not be called into question in the short term. The USDCOP
may depreciate slightly but will not overshoot. The disinflation
process is likely to maintain its course and the central bank may
keep on easing its monetary policy. A gradual consolidation of public
finances seems to be on track. The government’s target of a fiscal
deficit of 3.3% of GDP this year appears to be realistic thanks to
some spending cuts/reallocations, the tax reform and some recovery
in oil-related revenues (Ecopetrol, the national oil company, expects
a fiscal contribution of roughly 0.5% of GDP plus 0.1% of GDP in
dividend payments to the Treasury after two years without a
distribution of dividends). The Fiscal Rule Committee considers that
estimates for potential GDP growth and long-term oil prices may
provide the government with a fiscal leeway of up to 0.3% of GDP. It
remains to be seen whether the government will decide to loosen the
deficit target. Meanwhile, President Santos announced in February
fiscal stimulus aimed at creating 765k jobs and spurring economic
growth. But some of these measures appear to be a “repackaging” of
previous ones.
Despite a rather supportive policy mix, we do not contemplate any
tangible GDP growth acceleration until next year as: i/ consumption
will be undermined by tax increases, ii/ fiscal and spending execution
constraints will reduce the effectiveness of the increase in public
investment and iii/ the recovery in the extractive sector will be very
gradual. In the medium term, benefits associated with the completion
of the peace process and the implementation of further fiscal reforms
could boost confidence and lift growth potential by just under one
percentage point, notably through the huge potential of agriculture
and tourism. Nonetheless, a global environment that is less
favourable than in the past (lower growth in emerging markets, lower
commodity prices) should prevent Colombia’s economic growth from
exceeding 4% until the end of the decade.
Sylvain Bellefontaine
[email protected]
Colombia
2nd quarter 2017
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