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Summary of "Colombia: Upping the ante"

Core Content

This document provides an economic outlook for Colombia for the years 2018 and 2019, highlighting the country's improving economic performance, policy changes, and potential for future growth. It is authored by Luiz Eduardo Peixoto from the Latam Economic Research team at Banco BNP Paribas Brasil SA.

Main Views and Key Information

1. GDP Growth Forecast

• 2018 Forecast: Revised upward to 3.0% y/y from 2.5%, due to stronger-than-expected economic activity and increased investment.
• 2019 Forecast: Maintained at 3.5% y/y, which is above the market consensus. The growth is expected to continue with upward risks.

2. Monetary Policy Outlook

• BanRep Policy: The central bank is expected to pause its easing cycle in 2018 and halt further rate cuts by early 2019.
• Rate Impact: The cumulative effect of rate cuts since 2016 could add 0.3 percentage points to GDP growth in 2018 and 2019.
• 2019 Rate Adjustments: The central bank is expected to raise rates to neutral by the end of 2019, with three 25bp hikes anticipated, starting in Q2 2019.

3. Confidence and Investment

• Election Impact: A market-friendly outcome in the presidential election is expected to boost business confidence.
• Investment Recovery: Confidence is anticipated to stimulate fixed investment, construction, and durable goods sales, which have been underperforming.
• Energy Sector: The energy sector, which has seen declining investments, is expected to be a key beneficiary of improved sentiment.

4. Inflation and Output Gap

• Inflation Outlook: Inflation is expected to remain near the 3% target in 2018 and rise to 3.5% by 2019.
• Output Gap: A large output gap suggests that the economy is not overheating, even if growth exceeds potential.
• Non-tradable CPI: Sticky non-tradable inflation is expected to decline in 2019 due to tamer indexation.

5. External Balance and Fiscal Policy

• Current Account Deficit: The deficit has narrowed, mainly due to higher oil prices.
• Fiscal Deficit: Remains deep, requiring tighter fiscal policy in the near term.
• Fiscal Rule: Implies a 1.5pp of GDP adjustment by 2020, which could hurt public investment.
• Revenue Boost: A 0.8pp of GDP increase in revenues could soften the need for spending cuts.

6. Sustainable Growth and Reforms

• Growth Potential: Colombia is unlikely to reach 5% growth soon due to low diversification, declining oil output, and high business hurdles.
• Reforms Needed: To achieve sustainable growth above 4%, the government must implement supply-side and pro-growth reforms.

7. Government Agenda

• President-elect Ivan Duque is expected to focus on deregulation, streamlined customs, lower tariffs, and greater integration into global value chains.
• High Expectations: The success of the government’s agenda will be crucial to maintaining growth momentum.

Charts and Supporting Data

• Chart 1: Shows the impact of monetary policy cycles on real GDP growth, highlighting the cumulative effect of rate cuts.
• Chart 2: Displays selected activity components such as fixed investment, construction, and durable goods sales, illustrating their negative growth in Q1 2018.
• Chart 3: Provides a comparison of the overnight policy rate and annual inflation.
• Chart 4: Depicts GDP growth and the output gap, emphasizing the economic slack.

Legal and Regulatory Disclaimers

• The document is non-independent research and marketing communication, intended for professional clients and eligible counterparties.
• It is not investment research under MiFID II and does not provide financial, legal, or tax advice.
• Confidentiality: The information is provided confidentially and may not be copied or distributed without written consent.
• Conflicts of Interest: BNPP may have financial interests in the securities mentioned and may engage in transactions that are inconsistent with the views expressed.

Conclusion

The outlook for Colombia is positive, with improved economic activity, reduced external vulnerabilities, and policy shifts toward growth. However, sustainable growth will require fiscal discipline and structural reforms. The incoming government under President-elect Ivan Duque is expected to play a key role in driving these changes.