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Colombia Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views

Persistent weakness in benchmark crude prices will continue to underminereal export growth and fixed investment, helping to underpinour view for structurally slower growth over the next several years.We also anticipate a slowdown in real private consumption growthas consumers are hit hard by high inflation, rising interest rates anda significant sell-off in the exchange rate.Hydrocarbon sector weakness will also weigh on Colombia's balanceof payments position. Faltering oil prices and production will temperinvestment into Colombia and cool export growth.Meanwhile, slower oil production growth combined with increasingpressure to spend on social programmes will feed through to fiscalslippage in the years ahead. While the country is well positioned towithstand the storm, with a relatively low external debt burden anda sizeable stock of foreign reserves, the potential for deterioration inthe country's macroeconomic buffers will temper investor perceptionsof Colombia's sovereign creditworthiness.Although the government and Fuerzas Armadas Revolucionarias deColombia are on the cusp of a peace accord, the splintered natureof the left-wing insurgent group will ensure that the deal will onlyslowly improve the security environment.Major Forecast ChangesGiven still-accelerating headline price growth, we have revised upour 2016 average inflation forecast to 6.9%, from 5.8% previously.We have also revised up our end-2016 policy rate forecast to 7.00%,from 6.50% previously, as Colombia's Banco de la República hashiked more aggressively than we anticipated in recent months.

Table Of Contents

Colombia Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Major Forecast Changes..5
Key Risks..5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
Stabilising Oil Prices and Capital Inflows Will Drive Recovery8
Economic activity growth will begin to trend higher in Colombia over the coming quarters, driven by stabilising oil prices and capital
inflows. Although public and private consumption will remain under pressure, the economy will stage a modest recovery in 2017. 8
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS.9
TABLE: PRIVATE CONSUMPTION FORECASTS.9
TABLE: GOVERNMENT CONSUMPTION FORECASTS 10
TABLE: FIXED INVESTMENT FORECASTS. 10
TABLE: NET EXPORTS FORECASTS.. 10
Monetary Policy.. 11
Hiking Cycle Peaked11
Colombia's Banco de la República will maintain a tight monetary policy stance in the next few months, as inflation remains well above
the central bank's tolerance band. Exchange rate stabilisation and easing food price pressure will drive a deceleration in price growth in
H216 and see the bank initiate a cutting cycle by year-end.
Monetary Policy Framework12
TABLE: MONETARY POLICY FORECASTS. 13
External Trade And Investment Outlook. 14
Current Account Will Remain Tied
To Oil..14
Colombia's current account deficit will narrow modestly over the coming quarters, as a gradual rise in oil prices supports exports.
Declining oil production will lead to persistent current account deficits in the coming years, although capital inflows will cover the
shortfall.
Outlook On External Position. 15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.. 15
TABLE: TOP 5 GOODS EXPORTS. 16
TABLE: TOP 5 GOODS IMPORTS.. 16
Fiscal Policy And Public Debt Outlook 17
Weak Oil Revenues Will Underpin Deficits17
Colombia will post consistent fiscal deficits over the coming years due to weak revenue growth in light of low oil prices. Nevertheless,
government efforts to constrain expenditure growth will ensure a gradual narrowing of the shortfall.
TABLE: CURRENT ACCOUNT BALANCE FORECASTS 17
Structural Fiscal Position. 18
TABLE: FISCAL AND PUBLIC DEBT FORECASTS.. 19
Currency Forecast. 20
COP: Pace Of Appreciation To Moderate As Oil Takes A Breather20
The Colombian peso will trade broadly sideways over the coming months, as a more muted pace of oil price gains tempers currency
appreciation. We foresee modest strength in nominal terms in 2017, as rising oil prices further improve the country's terms of trade and
real interest rates rise.
TABLE: BMI CURRENCY FORECAST.. 21
Chapter 2: 10-Year Forecast. 23
The Colombian Economy To 2025.. 23
Structurally Weaker Growth Following Oil Bust.23
Substantially lower global crude prices and sluggish oil production growth will curb investment and export growth in Colombia. As a
result, we forecast slower average real GDP growth over the next 10 years than in the previous decade.
TABLE: LONG-TERM MACROECONOMIC FORECASTS. 23
Chapter 3: Political Outlook. 27
SWOT Analysis 27
BMI Political Risk Index. 27
Domestic Politics.. 28
Ceasefire Agreement Signals Peace Process Nearing A Close..28
The Colombian government and FARC are on the cusp of a deal to end the country's decades-long armed conflict. With the final point of
negotiation the ratification process for an agreement, we maintain our long-held view that a deal will be concluded this year.
TABLE: POLITICAL OVERVIEW.. 28
Long-Term Political Outlook.. 29
Many Structural Challenges Ahead29
While Colombia's long-term political outlook is set to remain relatively stable compared with its neighbours, we identify several
substantial political challenges for the government over the next decade and highlight three scenarios for change.
Chapter 4: Operational Risk. 31
SWOT Analysis 31
Operational Risk Index.. 31
Operational Risk. 32
TABLE: OPERATIONAL RISK 32
Market Size and Utilities 33
TABLE: LATIN AMERICA - MARKET SIZE AND UTILITIES. 34
Labour Costs 37
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE.. 38
Chapter 5:BMI Global Macro Outlook. 41
Global Macro Outlook. 41
Brexit Risk Casts A Long Shadow..41
TABLE: GLOBAL ASSUMPTIONS.. 41
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 42
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %.. 43
MACROECONOMIC FORECAST. 45
TABLE: MACROECONOMIC DATA and FORECASTS. 45

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