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Colombia Outlook 2Q17 Latam Economic Outlook 2Q17 Main messages 1. World growth continues apace, accompanied by a certain clarification regarding US policy. Overall. global risk remains a concern. 2. The Colombian economy will grow slightly faster than it did in 2016. Growth is expected to increase from 2% in 2016 to 2.1% in 2017 and 2.7% in 2018. 3. 2016 saw a healthy and significant adjustment to the current account. The current account deficit as a percentage of 2016 GDP stood at 4.4%, around 2% less than in 2015. We expect it will close around 3.3% on average in the next two years. 4. Inflation shakes off supply-side shocks and ratifies its sharp fall. After two years of exchange rate pressure and twelve months of the worst of “El Niño” phenomena on record, inflation consolidated its downward trend to stand at 4.7% at the close of the first quarter of 2017. 5. The Banco de la República has embarked on a downward rate cycle. With the drop in inflation and the external balance, the Bank will be able to reduce interest rates to 5.5% in 2017. Latam Economic Outlook 2Q17 GLOBAL Stronger growth, but still with significant risks Colombia Latam Economic Outlook 2Q17 Positive global momentum Main trends continue … … and central scenarios become more likely Recovery of industrial production and trade still underway A strong stimulus to US economy looks less likely… Low volatility in financial markets …but so does scenarios with strong protectionism Headline inflation continues to rise in advanced economies, but core inflation remains stable Central banks in developed countries lean towards policy normalization 4 Latam Economic Economic Outlook Colombia Outlook 2Q17 2Q17 Global growth continues to increase at the beginning of 2017 Global GDP growth Confidence indicators remain very high, although hard data still do not capture all the improvement in sentiment Forecasts based on BBVA-GAIN model (%, qoq) 1,2 1,0 China and developed economies show signs of strong growth. However, other emerging economies show mixed signals 0,8 0,6 GDP Growth Average Source: BBVA Research Jun-17 Mar-17 Dec-16 Sep-16 Jun-16 Mar-16 Dec-15 Sep-15 Jun-15 Mar-15 Dec-14 Sep-14 Jun-14 Mar-14 0,4 IC 20% IC 40% IC 60% 5 Latam Economic Economic Outlook Colombia Outlook 2Q17 2Q17 Financial stress remains low BBVA Financial Stress Index Volatility has decreased despite uncertainty about economic policies (normalized) 2,0 Monetary and fiscal stimulus mask some underlying weakness 1,0 Europe has been the exception, with some increase in sovereign spreads, linked to elections in France and the political outlook for the region as a whole 0,0 -1,0 -2,0 Apr-14 Oct-14 Latam Source: BBVA Research Apr-15 Oct-15 Asia Apr-16 Oct-16 Apr-17 Developed 6 Latam Economic Economic Outlook Colombia Outlook 2Q17 2Q17 Central banks on the way to policy normalization Official interest rates in the US (Fed) and Eurozone (ECB) (pp) 2,5 2,0 1,5 ECB End of QE ECB QE tapering 1,0 0,5 Source: BBVA Research, FED and ECB FED Fed continues to increase interest rates, though is still cautious about the economic outlook. Oct-18 Jul-18 Apr-18 Jan-18 Oct-17 Jul-17 Apr-17 Jan-17 Oct-16 Jul-16 Apr-16 Jan-16 0,0 ECB The ECB is to start discussing its exit strategy, but very cautiously. 7 Latam Economic Economic Outlook Colombia Outlook 2Q17 2Q17 Global growth revised up US EURO AREA 2017 2.3 2018 2.4 Increased LATIN AMERICA Unchanged Revised down 2017 1.1 2017 1.7 CHINA 2018 1.7 2017 6.3 2018 5.8 2018 1.8 WORLD Source: BBVA Research. Latin America includes: Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela 2017 2018 3.3 3.4 8 Latam Economic Economic Outlook Colombia Outlook 2Q17 2Q17 China: renewed recovery with old engines We revised up our growth forecasts for 2017-18, due to incoming data and a fiscal impulse. Gradual deceleration underway China: GDP growth (%) 8 7,3 6,9 7 6,7 But medium-term risks are still significant: 6,3 6 5,8 • Rebalancing of growth towards services and consumption has stalled 5 • Policy missteps could lead to a disorderly deleveraging 4 3 2014 2015 Forecast April 2017 Source: BBVA Research and CEIC 2016 2017 2018 Forecast February 2017 9 Latam Economic Economic Outlook Colombia Outlook 2Q17 2Q17 US: diminished prospects of a pro-growth fiscal impulse Growth increases in 2017 given pick up in investment. However, private consumption is expected to slow down US: GDP growth (%) 3,0 2,6 2,5 2,4 2,4 2,3 Risks stemming from economic policy continue despite a softer tone in the last months 2,0 1,6 1,5 1,0 0,5 0,0 2014 2015 Forecast April 2017 Source: BBVA Research and BEA 2016 2017 2018 Forecast February 2017 10 Latam Economic Economic Outlook Colombia Outlook 2Q17 2Q17 We maintain our view of gradual convergence of commodity prices to their long-run equilibrium levels SOYBEANS COPPER (USD/B) (USD/mT) (USD/lb) 120 600 3,3 100 550 80 500 60 450 40 400 20 350 0 300 Forecast February 2017 Forecast April 2017 3,1 2,9 2,7 2,5 2,3 2,1 1,9 1,7 Forecast February 2017 Forecast April 2017 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 1,5 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 BRENT OIL Forecast February 2017 Forecast April 2017 Source: BBVA Research and Bloomberg Oil prices will continue to get support from OPEC production agreement, as well as increase in demand. Copper prices will benefit from stronger demand and also supply disruptions. No significant changes in our view for long-term commodity prices. Forecasts mostly unchanged for oil and soybeans relative to February. 11 Latam Economic Economic Outlook Colombia Outlook 2Q17 2Q17 Global risks most relevant for Latin America are related to US policies and rebalancing in China 1 2 Lingering uncertainty about economic policies to be implemented in US, especially trade policies Policy stimulus in China to support investment could delay and slow down reforms to reduce structural imbalances 3 4 Elections in France and Italy in (the unlikely) case that Eurosceptic platforms prevail Risks stemming from monetary policy normalization, especially in the US 12 Situación Colombia 2T17 Colombia Sowing the future 2T17 ColombiaSituación EconomicColombia Outlook 2Q17 2017 growth will be slightly higher than that seen in 2016 We expect improved investment performance in 2017, due to public works and private industry, agriculture and mining investment programmes. GDP growth Colombia (% variation YoY) 4 (f) 3.1 3 Available leading indicators show a weak start to the year. However, we expect to see recovery in the second half of this year 2.1 2.0 2 1 dic-17 sep-17 jun-17 mar-17 dic-16 sep-16 jun-16 mar-16 dic-15 sep-15 jun-15 mar-15 0 Source: DANE and BBVA Research 14 2T17 ColombiaSituación EconomicColombia Outlook 2Q17 Investment in 2017 will cease to shrink, while consumer spending maintains its pace GDP, investment and consumer spending (% variation YoY) 5 3,8 4 3 2,0 2,1 2,1 2,4 2,7 Lower inflation and interest rates and greater relative confidence will see higher consumer spending from the second half of 2017 and especially in 2018. 2,6 2,0 2 The investment rate will rise again between 2017 and 2018, as a result of adjusting at a faster rate than aggregate GDP. 1 0 -1 -2 -3 -3,6 -4 2016 2017(p) GDP Private Consumption Source: DANE and BBVA Research 2018(p) Investment 15 2T17 ColombiaSituación EconomicColombia Outlook 2Q17 The economic slowdown is affecting the labour market with a lag Unemployment rate in 13 cities (%, end of period) 12 10.8 11 10.5 9.8 10 9.8 9.3 9 Higher unemployment rate is expected going forward on the prolonged deceleration. Though not at the levels of previous deceleration cycles as 2009 of 13% 8 The consumer spending dynamic will be affected by the deterioration in the labour market, especially in 2017. 7 6 5 2014 2015 Source: DANE and BBVA Research 2016 2017(f) 2018(f) 16 2T17 ColombiaSituación EconomicColombia Outlook 2Q17 Agriculture and construction will lead growth in 2017 GDP growth by sector (% variation YoY) Agriculture will benefit from better weather in 2017 Mid-level housing, 4G and improved local governments budget execution will continue to bolster the construction sector. Sector Agriculture 0.5 3.5 2.7 Construction 4.1 3.4 4.4 Financial and Corporate Services 5.0 3.2 4.1 Government and Social Services 2.2 1.9 2.6 Utilities 0.1 1.7 2.6 Industry 3.0 1.6 2.3 -6.5 1.6 -2.2 1.8 1.5 3.2 -0.1 1.4 2.9 2.0 2.1 2.7 Oil and Mining Industry will have a regular year due to weak demand Retail, Restaurants and Hotel Industry Transportation Mining will continue its weak growth 2016 2017(f) 2018(f) Total Source: DANE and BBVA Research 17 2T17 ColombiaSituación EconomicColombia Outlook 2Q17 Economic risk in Colombia has fallen The 2% adjustment in 2016 of the current account will favour long term growth. The considerable current account deficit caused pressure to maintain monetary policy rates high, limited the government's room for manoeuvre and created a sensation of vulnerability in the private sector. Fiscal and current account deficit (% of GDP) 0 -1 -2 -2.4 -3 -2.9 -3.0 -3.2 -3.6 -3.6 -4 -4.0 Tax reform will improve the sustainability of public finances. Between 2014 and 2016, the government made an important adjustment in expenditure. -4.4 -5 -5.1 -6 -6.4 -7 2014 2015 Current Account Deficit 2016 2017(f) 2018(f) Central Government Deficit Source: Banco de la República, DANE, the Ministry of Finance and BBVA Research 18 2T17 ColombiaSituación EconomicColombia Outlook 2Q17 In this context, inflation has slowed down significantly. We expect that at the end of 2017 the annual rate will be 4.1% Headline, core and food inflation (% variation YoY) 16 (f) 14 12 10 8 6 4 2 Headline Core dic-18 oct-18 ago-18 jun-18 abr-18 feb-18 dic-17 oct-17 ago-17 jun-17 abr-17 feb-17 dic-16 oct-16 ago-16 jun-16 abr-16 feb-16 dic-15 oct-15 ago-15 jun-15 abr-15 feb-15 dic-14 0 Food Source: DANE and BBVA Research Foodstuff prices will continue to fall in 2017 due to greater agricultural supply. Exchange rate stability will help to keep the price of imported goods down. We expect to see inflation end 2017 and 2018 at a annual rate of 4.1% and 3.4%, respectively. 19 2T17 ColombiaSituación EconomicColombia Outlook 2Q17 The Banco de la República has the path clear to reduce rates End-of-period monetary policy rate (%) 8 7.50 7 5.75 6 5.50 5.00 5 4.50 The reduction of the external imbalance risk and inflation allow the Bank to begin a downward rate cycle. We estimate that in 2017 the policy rate will reach 5.5%, then take a brief break before starting 2018 with rate reductions to 5%. 4 In the decision balance of the Bank’s Board, once inflation expectations approach the target of 3,0%, economic activity will play a more relevant role . 3 2 1 0 2014 2015 2016 2017(p) 2018(p) Source: Banco de la República and BBVA Research 20 2T17 ColombiaSituación EconomicColombia Outlook 2Q17 Given the Colombian economy's lower level of external vulnerability, the exchange rate will stay relatively stable Exchange rate With the correction of the current account deficit, external vulnerability will decrease, as will the economy's external financing needs. This suggests less pressure on the exchange rate. (Pesos per dollar) 3400 (f) 3300 3200 2016 average: 3054 (11.4%) 2017 average: 2972 (-2.7%) 2018 average: 2995 (0.8%) Within a positive context for oil prices and external stability, the peso should appreciate in 2017 compared to 2016, stabilizing slightly below 3,000 pesos to the dollar. 3100 3000 2900 2016 eop: 3010 (-4.7%) 2017 eop: 3015 (0.5%) 2018 eop: 2958 (-1.9%) 2800 2700 Source: Banco de la República and BBVA Research oct-18 jul-18 abr-18 ene-18 oct-17 jul-17 abr-17 ene-17 oct-16 jul-16 abr-16 ene-16 2600 It should not be forgotten that the US Federal Reserve will make two adjustments to interest rates before year end, according to our forecasts. This will put upward pressure on the exchange rate in the second half of the year. 21 2T17 ColombiaSituación EconomicColombia Outlook 2Q17 The main risk to economic growth comes from internal affairs 1 2 Additional delays to the public and private investment decisions which may have an impact on short- and medium-term growth Imbalances in the Chinese economy may cause a hard landing to its growth with important repercussions to commodity prices 3 4 Risk associated with the normalisation of monetary policy, especially in the US, which may affect capital flows, and as a result, the exchange rate and the space that BanRep has to reduce rates Uncertainties that are still associated with measures passed in the USA, especially in a commercial context, affecting export performance 22 Situación Colombia 2T17 Main messages 1. World growth continues apace, accompanied by a certain clarification regarding US policy. Overall. global risk remains a concern. 2. The Colombian economy will grow slightly faster than it did in 2016. Growth is expected to increase from 2% in 2016 to 2.1% in 2017 and 2.7% in 2018. 3. 2016 saw a healthy and significant adjustment to the current account. The current account deficit as a percentage of 2016 GDP stood at 4.4%, around 2% less than in 2015. We expect it will close around 3.3% on average in the next two years. 4. Inflation shakes off supply-side shocks and ratifies its sharp fall. After two years of exchange rate pressure and twelve months of the worst of “El Niño” phenomena on record, inflation consolidated its downward trend to stand at 4.7% at the close of the first quarter of 2017. 5. The Banco de la República has embarked on a downward rate cycle. With the drop in inflation and the external balance, the Bank will be able to reduce interest rates to 5.5% in 2017. Situación Colombia 2T17 ANNEX Situación 2T17 Colombia 2T17 ColombiaSituación EconomicColombia Outlook 2Q17 Summary of Baseline Scenario 2013 2014 2015 2016 2017(f) 2018(f) 4.9 4.4 3.1 2.0 2.1 2.7 Private consumption (YoY, %) 3.4 4.3 3.2 2.1 2.0 2.6 Public consumption (YoY, %) 9.2 4.7 4.0 1.8 1.8 2.1 Fixed investment (YoY, %) 6.8 9.8 1.8 -3.6 2.4 3.8 Inflation (% YoY, eop) 1.9 3.7 6.8 5.7 4.1 3.4 Inflation (% YoY, average) 2.0 2.9 5.0 7.5 4.3 3.3 Exchange rate (eop) 1.927 2.392 3.149 3.001 3.015 2.958 Devaluation (%, eop) 9.0 24.1 31.6 -4.7 0.1 -1.4 Exchange rate (average) 1.869 2.001 2.742 3.054 2.972 2.994 Devaluation (%, average) 3.9 7.1 37.0 11.4 -2.7 0.8 BanRep interest rate (%, eop) 3.25 4.50 5.75 5.75 5.50 5.00 Deposit interest rate (%, eop) 4.1 4.3 5.2 6.9 5.7 5.3 Fiscal Balance (% GDP) -2.3 -2.4 -3.0 -4.0 -3.6 -2.9 Current Account Balance (% GDP) Unemployment rate (%, eop) -3.2 -5.2 -6.5 -4.4 -3.6 -3.2 9.7 9.3 9.8 9.8 10.5 10.8 GDP (YoY, %) 25 2T17 ColombiaSituación EconomicColombia Outlook 2Q17 Chief Economist Juana Téllez [email protected] +57 347 16 00 Fabián García [email protected] +57 347 16 00 Mauricio Hernández [email protected] +57 347 16 00 María Claudia Llanes [email protected] +57 347 16 00 Alejandro Reyes [email protected] +57 347 16 00 Natalia Roa [email protected] +57 347 16 00 Intern BBVA-Research Jorge Sicilia Serrano Macroeconomic Analysis Rafael Doménech [email protected] Global Macroeconomic Scenarios Miguel Jiménez [email protected] Global Financial Markets Sonsoles Castillo [email protected] Global Modelling & Long Term Analysisl Julián Cubero [email protected] Innovation & Processes Oscar de las Peñas [email protected] Financial Systems & Regulation Santiago Fernández de Lis [email protected] Spain & Portugal Miguel Cardoso [email protected] Countries Coordination Olga Cerqueira [email protected] Digital Regulation Álvaro Martín [email protected] United States of America Nathaniel Karp [email protected] Argentina Gloria Sorensen [email protected] Mexico Carlos Serrano [email protected] Chile Jorge Selaive [email protected] Regulation María Abascal [email protected] Turkey, China & Geopolitics Álvaro Ortiz Financial Systems Ana Rubio [email protected] [email protected] Turquía Álvaro Ortiz [email protected] Colombia Juana Téllez [email protected] Financial Inclusion David Tuesta [email protected] Asia Le Xia [email protected] South America Juan Manuel Ruiz [email protected] Peru Hugo Perea [email protected] Venezuela Julio Pineda [email protected] 26 2T17 ColombiaSituación EconomicColombia Outlook 2Q17 Legal Notice This document, prepared by the Department of BBVA Research, is informative in nature and contains data, opinions or estimates relating to the date of the same, they are from its own research or based on sources believed to be reliable, and have not been independently verified by BBVA. 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