Download 5 A larger current account deficit with a very

Colombia Economic Outlook
Fourth quarter 2015
5
A larger current account deficit with a very gradual
correction over the medium term
A slow adjustment of the economy’s net exports and demand is delaying
correction of the current account
As was to be expected, the first effect of the slump in oil prices was a mounting current account deficit,
because the slowdown of domestic demand took longer and was more orderly than the sudden plunge in
commodity prices. On top of this, the boost for other exports that should arise from the greater currency
depreciation has still not materialised. And it could be delayed for even longer. The initial effect attributable
to the change in external relative prices is import substitution involving a switch to local production, ahead of
the stimulus to sales abroad of domestically produced items. The balance of trade thus saw an abrupt shift
and ran into deficit at the end of 2014, after several straight years of positive contributions to the current
account.
In 2016, there will be various factors that work in favour of a lower trade deficit. The oil price will move onto a
path of recovery and will average USD59/bbl next year, a level around 9% above the comparable figure in
2015. Industrial exports will perform better, largely due to the new oil derivatives produced at the Cartagena
refinery, as will those of the agricultural sector, while there will be a heftier adjustment of final consumption,
which will have a dampening effect on import growth.
Furthermore, in 2015 and 2016 several automatic stabilisers will have partly mitigated the pressure on the
current account from oil. First, the lower profits to be had by foreign oil and mining companies have led to a
smaller outflow of dividends sent abroad from Colombia. This drop will equal the fall observed in foreign
direct investment in 2015, but will be sharper in 2016, as the recovery of other tradable sectors and major
infrastructure projects will involve the inflow of stable funding from abroad that will offset the persistence of a
low level of investment in mining and oil activities and leave foreign investment stable over 2015 and 2016.
Second, the lower levels of exports and imports have meant that less has been paid to foreign companies for
foreign trade services. At the same time, the higher growth in developed countries, where a substantial
number of Colombian emigrants are employed, has given rise to an increase in the wiring home of
remittances. These will climb from representing 21% of the current account deficit in 2014 to 27% of the total
deficit in 2016.
Overall, the anticipated current account deficit as a percentage of GDP is 6.4% in 2015 and 5.5% in 2016.
The chief correction will come from the factor income account, which includes dividends sent abroad, since
whereas in 2014 this account contributed 65% of the current account deficit, this will be 37% in 2015 and
43% in 2016. On the other hand, the balance of trade will be the account that contributes most to the deficit,
the figure moving from 23% in 2014 to 72% in 2015 and 55% in 2016.
No decumulation of foreign exchange reserves is foreseen in 2015 (if anything only marginal, owing to
investment portfolio valuation and volatility options). Capital flows (both portfolio and direct) were bigger than
expected at the beginning of the year, which could relate to international investors having a favourable
opinion of Colombia’s domestic conditions. This has been confirmed by foreign issuance by the central
government, which has totalled USD3.5bn, and the funding from abroad for certain private companies, which
are elements that together have also helped to finance the current account.
That said, we cannot rule out decumulation of reserves in 2016, which, if this occurred, would reach
USD1.5bn (0.5% of GDP) at most, as low portfolio flows are expected on account of the normalisation of
Colombia Economic Outlook
Fourth quarter 2015
monetary conditions in the United States. Moreover, foreign direct investment ought not to increase relative
to the figure that this year will show (around USD12bn) and the options for foreign issuance open to private
sector interests and the government will be more limited, given the higher interest rates abroad.
Even with this potential reduction in foreign exchange reserves, these will be at entirely healthy levels when
set against the dollar value of GDP (16% of GDP) and total imports (enough to cover over 10 months of
average imports). Furthermore, Colombia still has the IMF’s flexible credit line in its arsenal, which
guarantees the country liquidity in the event of unexpected difficulties as regards international credit and
capital flows.
Figure 5.1
Figure 5.2
Current account and financing (% of GDP)
7,0
6,0
5,0
5,5
5,2
4,4
4,0
4,1
4,3
4,1
4,1
1,1
5,5
4,8
5
3,7
4
5,0
4,0
1,5
6
3,0
3,4
3
3,0
2,0
6,0
3,3
3,1
2,9
4,3
Components of the current account (% of GDP)
7,0
6,4
2
1,8
0,5
1,0
0,3
3,0
1
2,0
0
0,0
2,4 2,3
0,7
-1
1,0
-1,0
-1,2 -1,2
-2
-2,0
2011
2012
2013
Current Account Deficit
2014
FDI
2015
-1,4 0,0
2016
Acumulation RIN
Source: Banco de la República and BBVA Research
Trade Deficit
2014
Factor Income
2015
2016
-1,6 -1,6
current transfers
remittances
2017
Source: Banco de la República and BBVA Research
Colombia Economic Outlook
Fourth quarter 2015
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Colombia Economic Outlook
Fourth quarter 2015
This report has been produced by the Colombia Unit
Chief Economist for Colombia
Juana Téllez
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Fabián García
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José Vicente Romero
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Mauricio Hernández
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María Claudia Llanes
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