Colombia Watch
Group Economics Emerging Markets Research
07 January 2016
Oil price spoils the party Marijke Zewuster Head Emerging Markets Tel: +31 20 383 0518 marijke.zewuster@nl.abnamro.com
Falling oil price slows growth
But long-term outlook remains bright
Greater political stability helps recovery
Current account deficit is main risk
Commodity dependence creates vulnerability Due to its dependence on commodities, we have classified Colombia as one of the six major emerging economies that are vulnerable to a tightening of global financial conditions. Over three quarters of the country’s exports consist of commodities. Oil alone accounts for over half of export revenues and a fifth of public revenues. Small wonder then that the oil price slump caused a growth deceleration and a deterioration of the external position in 2014/15. The increased risks are also reflected in the higher CDS premium and weaker currency. The peso declined over 20% versus the dollar last year, making the Colombian currency one of the worst performers alongside the Brazilian real in 2015. Otherwise, however, Colombia is holding up well compared to the rest of the region and the medium-term outlook is not unfavourable. Moreover, the signing of a peace treaty between the country’s largest guerrilla group, the FARC, and the government now looks imminent in the first half of next year, possibly giving confidence a fresh boost.
Weakening peso…
…drives up inflation and interest rates
COP/USD
% y-o-y/%
12
3400
10 3000
8 6
2600
4 2200 1800 Jan/14
2 0 Jul/14
Jan/15
Jul/15
Jan/16
06
07
08
09
10
11
Inflation Source: Bloomberg
12
13
14
15
policy rate
Source: Bloomberg
Prolonged economic prosperity thanks to political stability and reforms Torn by drug cartels and guerrilla groups, Colombia was long seen as one of the most dangerous countries in the region. However, the country’s image has improved markedly since the last crisis in the late 1990s. The US-sponsored war against drugs has broken
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Colombia Watch - Oil price spoils s the party - 07 January y 2016
the power of the drug g cartels and th he peace talks with the largesst guerrilla grou up, the FARC, are now in the eir final stages s. This heralds the end of ove r fifty years of internal ntation of econo omic reforms hhas improved th he public warfare. Additionally,, the implemen finance es and broughtt inflation unde er control. In 20 011 this promptted the leading g credit rating agencies (Moo ody’s, S&P and d Fitch) to reins state the countrry to investmen nt grade ost in the previious crisis of 19 998/99. Buoyedd by all these positive p status,, which it had lo develo opments, and rriding the crest of a commoditty boom, Colom mbia staged a growth g spurt 014. This has now been interrrupted by the sslump in oil prices. betwee en 2004 and 20
Stron ng growth % y-o--y
8 6 4 2 0 -2 -4 -6 9 97
99
01
03
05
07 7
09
11
13
15
17
Source: EIU
2015 was w actually not too bad Econo omic growth slo owed from 6.5% % y-o-y in the fiirst quarter of 22014 to 2.8% in n the first quarter of 2015, and then recovered slightly. In the third quarter GDP grew by 3.2% y-o-y, with th he average for tthe first nine months m amounting to 3%. Bassed on the lates st figures, we hav ve revised our growth estimate for 2015 from 2.5% to 3%.. On the deman nd side, private e consumption remains vigoro ous, advancing g 3.7% y-o-y in the first nine months. m Investm ment growth sllid to 2.8% in th he same period d, after surgingg almost 12% in n 2014. Importt growth droppe ed from 9.2% in 2014 to 2.9% % in the first ninne months. Exp ports, by contrast, recovered ffrom a contracttion of 1.7% in the same periood in 2014 to moderate m growth h of 0.3%. On b balance, howev ver, the externa al sector’s conttribution to gro owth remains negativ ve.
cceleration in economic grrowth in 2016 6 No ac While the estimates ffor 2015 have been revised up u by 0.5%, wee have reduced d the 3 to 3%. Aiided by the weaker forecasts for 2016 byy the same perrcentage from 3.5% m the sustained growth in thee US and the upturn in currency, Colombia ccan benefit from e. The US and Europe are still Colombia’s most m importantt export marketts, with Europe shares s of, respective ely, about 30% and 15%. We are also cautioously optimistic c about the directio on of commodiity prices. How wever, a restricttive economic ppolicy will continue to stand in the way of re ecovery for the e time being. Pa artly due to thee weak currenc cy, inflation elf compelled to tighten the m monetary policy y. Besides a rose and the central bank found itse c the im mpact of the we eather phenomena El Niño onn food prices also plays a weak currency role. Since S Septembe er, interest rate es have been raised r by 125 bbasis points to 5.75%. The last intterest rate step p was at the en nd of December and one or tw wo more rate hikes could take place early in 20 016. Inflation ju umped to 6.8% in December, well above the e target of n, domestic demand is still fairly strong, part rticularly in the light of the 2% to 4%. In addition ampering growtth, particularly where these current account deficcit. Spending cuts are also ha ponement of planned investm ments in infrasttructure. Poor are causing the postp
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Colombia W Watch - Oil price spoils s the party - 07 January y 2016
infrastructure, alongsside widesprea ad corruption an nd bureaucracyy, is a chief fac ctor in keepin ng productivity low and production costs high. The IMF esttimates Colomb bia’s potential growth at 4..25%. This see ems reasonably y realistic for thhe years after 2016, 2 provide ed the governm ment resumes its investments s in the much-nneeded infrastrructure improv vements withou ut too much de elay, oil prices recover r sufficieently, and political stability is main ntained.
High current c accou unt deficit is most importa ant risk The co ombination of ssubstantial (cap pital) goods imports and a deecline in the demand for and prrice of Colombiia’s main export products pus shed the currennt account deficit sharply higherr in 2014. Howe ever, despite th he continuing slide s in oil and ccoal export rev venues, the current account deficcit did not worsen further in 20 015 and may eeven have imprroved y. This was beccause imports showed a similar strong fall. Due to the wea akening of slightly the peso and the ressulting decrease e in GDP in US SD terms, the ddeficit as a percentage of h risen furthe er, namely from m 5.2% in 2014 4 to about 6.5% % of GDP in 2015. Thanks GDP has to mod derate domesti c growth and a slight improve ement in the teerms of trade, the current accoun nt deficit is exp pected to fall to o 4.7% in 2016 and 4% in 20117. This, howev ver, depends on the futurre direction of commodity c pric ces and the devvelopment of th he Chinese olombia’s largest trading partnner, China already economy. Though byy no means Co nts for over 10% % of its exports. Even more important, how wever, is the ind direct effect accoun that a stronger-than-e nomic deceleration in China ccould have on commodity c expected econ owth. If, contrarry to our expec ctations, the deeficit were to ris se further, prices and global gro mbia would beco ome even more vulnerable to o rising interestt rates in the in nternational Colom capitall markets and tthe associated increase in ris sk aversion. In tthis case, a strronger decline e in domestic d demand would be necessary to restore the bbalance.
Current acco ount deficit is s too high…
…and … foreign debt ratios aare deterioratting
% GDP
Debt/exports D
2.5 5
4 4.0 2 2.0
2.0 0
0.0 -2 2.0
1.5 5
4.0 -4
1.0 0
-6.0 0.5 5
-8.0 97
99
01
03
05 5
Trade balancce Source: S EIU
07
09
1 11
13
Current account a
15
17
0.0 0 97
99
0 01
03
05
07
09
11 1
13
15
Sou urce: EIU
A relatted risk is that tthe current acc count deficit an nd weak currenncy are causing g a severe deterio oration of the fo oreign debt ratios. Partly due to the depreciaation of the currency, the total fo oreign debt hass already climb bed from 27% in 2014 to almoost 40% in 2015, whereas the debt ratio versus the export inco ome has worse ened from arouund 1.5 to almo ost 2. ver, the large in nternational currency reserve es, flexible IMF credit line and d healthy Howev economic policy still constitute a strrong buffer aga ainst these riskks. In this light, a repeat of ombia lost its in nvestment grad de status is nott a likely scena ario. the 1990s when Colo
17
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Colombia W Watch - Oil price spoils s the party - 07 January y 2016
Key indicators forr the Colombian economy y 20 013
2014
2015e
2016e
2 2017e
GDP (% % yoy)
4.9
4.6
3.0
3.0
4.0
CPI inflation (% yoy)
2.0
2.9
4.9
4.6
3.3
-1.5
Budgett balance (% GDP))
-0.9
-2.0
-2.0
-2.5
Government debt (% GDP P)
43
46
47
48
47
Currentt account (% GDP))
-3.3
-5.2
-6.5
-4.5
-4.0
Gross fixed f investment (% % GDP)
2 24.1
25.5
26.2
25.9
25.7
Gross national n savings (% % GDP)
2 20.9
20.8
20.5
21.4
21.9
USD/CO OP (eop)
19 927
2392
3175
3200
3100
EUR/CO OP (eop)
26 655
2895
3334
3040
3410
Budgett b alance, current acc. a for 2015, 2016 and 2017 are ro ounded figures
Source e: EIU, ABN AMR RO Group Econom mics
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