Download 2012-288-IM-Colombia-COMPLETO

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COLOMBIA
1. General trends
Economic growth in Colombia was 5.9% in 2011, representing one of the best performances in the
region. This was largely due to an upturn in domestic demand and high growth rates in mining, transport
and commerce. Inflation stayed within the range set by the authorities, unemployment was down and
foreign direct investment flows surged. The fiscal deficit shrank by just over one percentage point of
GDP, thanks to higher-than-expected tax receipts and on-track budget execution.
There is concern that this growth rate might be dampened by a number of international and
domestic factors, including the potential impact on the Colombian economy of uncertainty in the
international markets, in particular in the United States and the euro zone. However, a rallying economy
in the United States, which remains Colombia’s main trading partner despite efforts to diversify, has
allayed these fears. On the domestic front, the worst rains in recent history caused severe flooding across
the country, bringing huge losses for the population and driving up prices. The government devised a
response strategy that called for additional public spending. Despite these problems, surveys reveal an
improvement in confidence indicators among consumers and trade and industry representatives, in
particular towards the end of the year. This sense of optimism was boosted by the entry into force of the
trade promotion agreement with the United States in May 2012 and the adoption of a set of structural
reforms to ensure the sustainability of public finances and promote competitiveness and labour
formalization. The government has also implemented new macroprudential measures and strengthened
others adopted from 2005 on in an effort to reduce vulnerability to potential crises; the strength of the
main economic aggregates is also helpful in this regard.
2. Economic policy
(a)
Fiscal policy
Several legal and constitutional reforms were approved in 2011. These offer a new framework
that consolidates the progress made on the fiscal front over the past 10 years and, from a structural
perspective, provides the country with savings and stabilization instruments in anticipation of a surge in
revenue owing to the mining sector surplus. The reforms consist of the law establishing the fiscal rule, the
law on fiscal sustainability and the constitutional and legal reform of the general royalty system.
At year-end 2011 the central government was running a fiscal deficit of 2.9% of GDP, more than
one point below the target, thanks to a 25% jump in tax revenue that exceeded expectations. The healthy
pace of economic growth, the tariff and tax reforms of 2010 and better oversight all contributed to these
higher receipts. Expenditure was up by around 17%, reflecting the outlays needed to cope with the
emergency caused by torrential rains, which equated to 0.8% of GDP and accounted for the increase of
over 60% in investment expenditure. Despite high levels of spending, improved tax collections enabled
Colombia to surpass its deficit-reduction target and even draw nearer to the fiscal rule target of bringing
the deficit down to 2.4% of GDP by 2014. The primary deficit was down a sharp 0.8 percentage points, to
stand at 0.2% of GDP. The non-financial public sector balance presented a similar picture, as it closed the
year with a deficit of 2.2% of GDP, one point of GDP lower than the figure recorded in 2010.
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(b)
Monetary, exchange-rate and macroprudential policy
In response to strong domestic demand and a slight upward trend in prices, the monetary
authority decided to change its policy of gradually lowering the intervention rate, in place from December
2008 to April 2010. Starting in February 2011 the benchmark interest rate was raised several times, from
3.0% to 4.75% in December 2011 and then to 5.25% in February 2012. Market rates followed suit,
including both investment and consumer rates. Consumption nevertheless remained buoyant, and at 1
December there was significant nominal variation in consumer lending (24.6%), business lending (17.0%)
and the mortgage portfolio (17.6%), none of which have since shown any signs of decline.
With regard to monetary aggregates, interventions in the foreign-exchange market were the main
force behind expansion in the monetary base, which posted nominal annual growth of 14%. Sustained
growth was also observed in M1 (10.8%), M2 (18.9%) and M3 (18.2%).
There was a trend towards currency appreciation during the first half of the year, as perceived
country risk improved after Colombia was upgraded to investment grade by three rating agencies. The
central bank therefore continued to intervene in the foreign-exchange market through the direct purchase of
a minimum of US$ 20 million a day, accumulating a total of US$ 3.72 billion under a programme that was
in place until September. The second half of the year saw a reversal in this trend as international risk
perceptions shifted. The reserve purchase programme was suspended and replaced with the purchase of up
to US$ 200 million in volatility options in the event of deviation from the average exchange rate. Despite
these measures, the peso remained strong in 2011 and real exchange rates were almost identical to 2010.
Amid international uncertainty and in view of the likelihood of contagion, other macroprudential
policies were adopted in addition to the liquidity controls established by the central bank. These included
a number of legislative reforms, the most important being a constitutional amendment requiring that
public spending be fiscally sustainable. Changes were also made to the system for distributing mining
royalties among the regions. The government limited foreign-currency transactions by pension funds to
2.5% of the value of each fund, in order to curb exchange-rate volatility in the short term.
(c)
Trade policy
In 2011, the United States Congress ratified the country’s free trade agreement with Colombia,
which established a short internal adjustment period before the agreement entered into force in May 2012.
In addition, the Government of Colombia adopted measures to boost foreign policy that led to new trade
links. Notably, negotiations began on a new free trade agreement with the Republic of Korea.
3. The main variables
(a)
Economic activity
The year 2011 closed with economic growth of 5.9%, a result that exceeded even the most
optimistic forecasts. The best-performing sectors were mining, transport and communications, commerce
and financial institutions, and construction. The mining sector was boosted by soaring external prices for
oil and coal; both subsectors surpassed their record highs in terms of exploration and extraction.
Construction, one of the government’s key sectors, registered growth both in the residential component
(boosted by social housing projects) and the public works component. During the second half of the year
in particular, several projects were executed to repair the damage caused by the heavy rains (drainage
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canals and engineering projects). Although the value added of coffee dropped, the agricultural sector
showed some signs of recovery compared with the meagre growth recorded in previous years.
On the demand side, the investment component registered the sharpest growth. Transport
equipment and machinery and equipment in particular contributed to a 17% rise in investment, which led
to an investment-to-GDP ratio of 27.1%. Private consumption continued to gain momentum on the back
of satisfactory expansion of domestic durable goods consumption and a 22% jump in imports fuelled by
the currency appreciation seen since 2007. Government consumption expenditure meanwhile grew only
moderately over the course of the year but picked up slightly during the last quarter. Exports were up
11.4% in 2011, corresponding in the main to oil and coal sales that offset the fall in banana and flower
exports. The strong purchasing power of the peso meanwhile encouraged the import of consumer durables
and capital.
(b)
Prices, wages and employment
Inflation was higher throughout 2011 than in 2010. Nevertheless, at year-end the annual variation
stood at 3.7%, placing it within the target range established by the central bank (2%-4%). Food was the
main cause of inflationary pressures, in part because of high external prices but mainly because of the
torrential rains that began in late 2010 and continued throughout 2011, hitting agricultural cycles and
supply. Prices for regulated goods and services also climbed, owing to higher international fuel prices as
well as aqueduct and gas pipeline breaks caused by rain-triggered landslides. Core inflation (which
excludes food and regulated goods and services) also trended upwards, rising from 1.8% to 2.4%. The
trend for tradable goods (not including food) turned towards positive year-on-year rates in August.
The labour market also reflected the buoyant economy, recording the lowest national
unemployment rate (10.8%) in 10 years and the highest participation rate (63.7%). Burgeoning demand
translated into a 4.2% increase in the number of employed persons. An analysis by area shows that both
urban (13 areas) and rural labour markets saw unemployment trend down while participation rates rose.
Job quality, however, looks less promising: the number of own-account workers is rising at the same pace
as the number of employed persons and accounts for 43% of total employment. The rate of informal
employment, meanwhile, remains above 51%.
(c)
The external sector
As in 2010, the balance-of-payments current account presented a record deficit of around 3% of
GDP. The surplus in net income from current transfers (thanks to remittances) and in the merchandise
trade balance (heavily influenced by oil and oil products) was outweighed by factor income outflows.
These chiefly related to investment income, in particular profits and dividends of foreign companies
operating in the country.
The financial account posted a surplus, thanks for the most part to foreign direct investment, which
surged by 92% between 2010 and 2011 and equated to 4% of GDP, exceeding the government’s target by a
wide margin. The main recipients of this investment were branches and subsidiaries of oil and mining firms
(58%), followed by companies working in the transport and communications sector. Foreign portfolio
investment also expanded considerably compared with the previous year, thanks to government-issued longterm debt securities and long-term bonds issued by companies in the financial and electrical sector. Direct
investments made by Colombia abroad also reached unprecedented levels in terms of the amounts involved
and increased by 26% over the period under consideration. These outflows went primarily to firms working in
the mining, manufacturing and commerce sectors, and to pension funds in other Latin American countries.
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The increase in exports was limited to just a few products; the dollar value of exports rose by
43%, but 30 percentage points of this figure concerned oil and oil products. The value of coal and coffee
exports also rose sharply, but the volume of coffee exported was up by just 5.4%. The value of nontraditional exports represented only 6.8 points of the total variation. The industrial sector performed
particularly well in this category, expanding by 21%.
Imports were up 34% in value terms, owing to soaring imports of different categories of products,
principally capital goods (42.7%). The main drivers were transport equipment (which accounted for
approximately two thirds of this increase) and raw materials and intermediate products, especially fuels.
Imports of consumer goods slowed in comparison with the previous year, but still registered a sizeable
increase (25.7%).
The United States remains Colombia’s main trading partner, followed by the European Union and
Chile. Trade with these partners helped offset the slow recovery of trade between Colombia and the
Bolivarian Republic of Venezuela since bilateral relations began to return to normal in 2010. China is an
important partner for Colombia, especially with regard to the import of electrical material and equipment.
4. First quarter of 2012: general trends
During the first quarter of 2012, some sectors were able to maintain the high growth rates seen the
previous year, while others experienced a slowdown in their activity and declines in certain products.
Retail trade sales increased by 6% during the first quarter, led by strong household consumption that was
also reflected in a rise in the consumer confidence index in April. Industrial production by contrast grew
just 1.7% during the first quarter (versus 4.4% over the same period the previous year) owing to a decline
in oil refining and falling chemical industry output. The main source of growth in 2012 is expected to be
private demand, combined with a public investment drive in the regions hardest hit by the torrential rains
and additional funds for the regions from mining royalties. Foreign trade continued to grow vigorously
during the first quarter, albeit at a slower pace than the previous year. Exports expanded by 21.5%,
fuelled by external sales of oil and coal. Imports were up 13.6% following a rise in external purchases of
fuels and vehicles.
Central government tax receipts grew at rates of over 20% during the first two months of 2012,
supporting official projections of a lower fiscal deficit this year. In May, the government announced its
draft structural tax reform, which seeks to create a more equitable tax system, promote investment and
employment and strengthen business formalization policies rather than generate more revenue.
The gradual increase in the benchmark interest rate, which reached 5.25% in February, was
reflected in a slowdown in total lending, in particular commercial lending. Consumer and mortgage
lending, meanwhile, sustained their previous growth rates (25% and 8%, respectively). In May the
government deployed a new temporary prudential measure requiring banks whose past-due portfolio has
increased to step up provisioning by 0.5%.
In March, the Colombian peso posted real appreciation of 6.4% in comparison with the same
month of the previous year, owing to greater foreign direct investment and portfolio inflows, which were
up 30.2% and 14.9% respectively compared with the first quarter of 2011. The foreign-exchange balance
posted a 178% surge in net public-sector flows. In February the central bank resumed its daily purchases
of US$ 20 million; to March it had accumulated US$ 779.9 million.
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Although unemployment fell to 11.6% during the first quarter of 2012, this remains one of the
highest levels in the region and the rate of informal employment stands at over 50%. As a complement to
its formalization strategy, the government presented to congress its unemployment insurance bill aiming
to give workers more protection.
Annual inflation to March stood at 3.4% as pressure from food prices and electricity tariffs eased.