Colombia at a crossroads after historic FARC peace deal
The country traditionally associated with coffee, crude oil, drug cartels and deep-seated internal conflict, Colombia is turning over a new leaf. Whether the change is happening by design or by default, it must be said that while some of the recent developments in Colombia are welcome, others are concerning. President Santos and his political allies have managed to create a constitutionally-binding peace process that legally brings to an end the 52-year conflict with the Marxist rebel groups operating in the country. Colombia’s parallel economy in which rebel groups collected war taxes, operated drug cartels and engaged in kidnapping and extortion, could also be drawing to a close. This positive development promises to mark a turning point in the country’s economic story. Nevertheless, the economy is facing tumultuous times: a historic collapse in the price of commodities, particularly oil, has shocked Colombia’s external sector, resulting in a weaker peso, a higher current account deficit and a dent in government revenue. More recently, inclement weather has affected agricultural output and raised food prices, which has forced the Central Bank to undergo a drastic tightening cycle in order to bring inflation back under control.
These unprecedented factors are all impacting the economy in complex ways. FocusEconomics consulted Nelson Vera, Macro-Chief Economist at the Asociación Nacional de Instituciones Financieras (ANIF) for additional insight into Colombia’s economic dynamics. ANIF is the winner of the FocusEconomic’s best overall forecaster award for Colombia this year.
BanRep has stated that it aims to reduce inflation and ease the current account deficit by hiking rates. However, some people question the severity of the tightening cycle, suggesting that it may be an over-adjustment given that the high levels of inflation are due in part to transitory factors, such as the peso’s previous depreciation and the El Niño phenomenon. Do you feel that the Bank has over-adjusted and that the tightening cycle could end up impacting domestic demand more than originally intended?
Vera: "Clearly those who criticize Banrep for hiking rates in the face of unanchored inflation expectations don’t understand the Inflation Targeting Framework under which our Central Bank operates. The repo hikes that Banrep has been enacting are more than warranted, seeing that inflation has not only surpassed the 8.6% mark in June, but that inflation expectations for end 2016 are in the range of 6–6.5% and near to 4% even at the end of 2017. We must be careful not to follow in Brazil’s footsteps, thinking that lower aggregate demand, FX pass-through or temporary climate factors will bypass the need for the central Bank to act. We all know the results in Brazil: 4% GDP contraction coupled with 10% inflation."
Owing to a plunge in oil prices, Colombia registered a fiscal deficit equivalent to 3.0% of GDP in 2015. The government expects the fiscal deficit to widen to 3.9% in 2016 and to shrink to 3.3% of GDP in 2017. It is unclear where oil prices will end up leveling off, but the Consensus Forecast is at around USD 60 per barrel at the end of 2017. If this were the case, what would it mean for Colombia’s budget? Is this price still too low for Colombia to count on oil as a meaningful source of government revenue?
Vera: "The recent Medium Term Fiscal Framework (MTFF, government data) takes into account a forecast for oil prices of around USD 42/barrel in 2016, which is in line with our forecasts. Having said that, the fiscal revenues pertaining to the oil and mining sector are not likely to return to their peak levels of 2.5% of GDP observed in 2013. If the oil price tends to stabilize in the neighborhood of USD 60 per barrel in the next 5 years, oil revenue could hover around 0.5-1% of GDP per year."
The government has stated that tax reform is required to secure new revenue and help the country cope with the impact of low oil prices. Will the tax reform be able to replace oil revenue and stop the deficit from breaching the government’s targets? Are the government’s assumptions for GDP growth and new tax revenue sources too optimistic?
Vera: "Precisely, the recent MTFF sees serious revenue gaps in the coming years in order to comply with the fiscal deficit targets. These shortfalls reach 3% of GDP in 2020 and almost 4% of GDP in 2022-2026. Note that those numbers are far greater than the 2% of GDP that even the most optimistic variant of a Structural Tax Reform can produce."
Colombia has long been described as two countries in one: a modern economy in the urban areas with a relatively-well educated workforce, competitive infrastructure and a stable financial system, while in other parts of the country violence associated with drug cartels and rebel groups is still rampant. However, President Santos and the FARC have recently reached an agreement to end hostilities, and peace talks are about to start with other rebel groups. To what extent will the peace pact impact the regional discrepancies across the country? If it takes hold, can we expect areas once dominated by rebel groups to become more attractive to investors?
Vera: "The subject of the “peace dividends” in Colombia has been a hotly debated issue in Colombia. In terms of growth, we don’t see our economy jumping to 5-5.5% GDP growth over the next five years, as some analysts claim, not least because the reversal in the commodities super-cycle has lowered our potential output from its historic value of 4.5% to 3.5%. At most, the peace process could add in the region of 0.3-0.5% of additional growth each year, but that will depend on the extent to which the government can increase regional infrastructure to elevate the productivity of those rural areas.
"This all comes with the caveat that the National Liberation Army (ELN, the remaining guerrilla group) or the “BACRIM” (an umbrella term for different criminal groups) might fill the territories which are currently held by the FARC. This is a major reason why we don’t see any “dividend” in lower security spending either. Colombia currently spends around 3% of GDP on security-defense, 2% to the army, 1% to police. We may have to rebalance that spending to 1% army, 2% police in order to focus on urban violence."
Latin America’s economy is expected to contract for a second consecutive year in 2016. A protracted recession in Brazil and Venezuela is dragging on the region’s growth and rising political risks in these countries are clouding the region’s outlook. How will these regional developments affect Colombia’s economy this year?
Vera: "Colombia is greatly influenced by what happens to its major trading partners of the region, Ecuador and Venezuela. As these two countries face strong headwinds, Colombia will be affected via lower exports, which is precisely what has been happening in the last few years."
Colombia has come a long way from where it was 17 years ago, when a poorly managed economy and a malfunctioning financial sector triggered a crisis that resulted in a recession, with GDP contracting 4.2% in 1999. The country has since developed a stable financial system, organized its government finances and transformed its economy, however, this will be tested by external challenges stemming from the oil price shock and high inflation. We polled 34 local and international analysts for their projections for this year and next. The panel of forecasters foresees GDP growth slowing from last year’s 3.1% to 2.3% this year. Colombia’s relatively solid economic foundations bode well for growth and should allow for a prompt recovery after this year’s expected deceleration. Analysts project the economy picking up next year and the Consensus Forecast is for 2.9% growth in 2017.
Date: July 21, 2016
TagsBrexit Argentina TPP China Healthcare OPEC Tunisia Ukraine Precious Metals Commodities Energy Commodities Consensus Forecast oil prices Asia Economic Growth (GDP) Oil Germany Housing Market India Euro Area United States Investment IMF Sub-Saharan Africa Trade Africa Turkey Portugal Base Metals Commodities UK Iran G7 Infographic Company News Japan USA Major Economies Canada Emerging Markets Exchange Rate Inflation Italy Commodities Greece France precious metals Latin America Eastern Europe Spain Cryptocurrency Nordic Economies South Africa Unemployment rate European Union Bitcoin Vietnam Forex Agricultural Commodities MENA Venezuela Australia Gold Russia Colombia Brazil Mexico Banking Sector United Kingdom
1 day ago
1 day ago
Peru - The rate of expansion in economic activity decelerates notably in June after two months of growth euphoria.… https://t.co/oaGaSZ0x3w
1 day ago
On 16 August, Indonesian President Joko Widodo presented the 2019 budget to parliament. The budget is designed to s… https://t.co/s357VgYZ1N
2 days ago
Bank Indonesia hikes rates in August; government announces import restrictions to stabilize currency. Full story +… https://t.co/k2LKRbEbwO
2 days ago
- Can the Wisdom of the Crowds predict the results of the 2018 World Cup?
- Railway Mania: The Largest Speculative Bubble You’ve Never Heard Of
- From Riches to Rags: Have Cryptocurrencies Crashed for Good?
- Investment looks to Latin America, but forecasts are not encouraging
- Turkey: Erdogan has cemented his grip on power - now what about the economy?
- 50 Top Economics Influencers to Follow
- How can Latin America’s business environment benefit from technological change?
- Mexico: A look at the past, present and future as elections yield AMLO victory
- Italy’s New Populist Government and the Eurozone: Prelude to a Crisis?
- Latin America moves toward increased integration as U.S. protectionism grows
- How can Latin America increase productivity without affecting the quality of employment?
- How will Saudi Arabia's economy benefit from lifting the women's driving ban?
- Which countries are the most prepared for the upcoming digital revolution?
- India Under Pressure from the U.S. on Trade Policy
- The Story of Steel
- Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
- What the TPP means for trade in Latin America
- Elections in Russia: Analysis and Implications
- Nearly a Third of Latin Americans Have No Right to a Pension
- A Look at Healthcare Models Around the World
- The Poorest Countries in the World
- Newly-elected Chilean President Sebastian Piñera faces a myriad of challenges - economic and otherwise
- The Economic Effects of Trade Protectionism
- Regional Disparity: The Dark Side of Inequality in Latin America
- Coal: The story of the world's most abundant fossil fuel
- Gold: The Most Precious of Metals (Part 3)
- Venezuela's Electoral Conundrum
- Trump's 1st Year: 95 Analysts Surveyed on U.S. Economy
- The Latest on China and What's in Store for 2018
- An in-depth look at the Eurozone’s booming economy and the challenges that lurk in the shadows
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- What will be the most miserable economies in 2018?
- The World's Top 10 Largest Economies
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- Russian economy update in wake of OPEC deal announcement
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit