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Colombia Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

Weakness in benchmark crude prices will continue to undermine real export growth and fixed investment, helping to underpin our view for structurally slower growth over the next several years. We also anticipate a slowdown in real private consumption growth as consumers are hit hard by high inflation, elevated interest rates and a weaker exchange rate. Hydrocarbon sector weakness will also weigh on Colombia's balance of payments position. Faltering oil prices and production will temper investment into Colombia and cool export growth. Meanwhile, slower oil production growth, combined with increasing pressure to spend on social programmes, will feed through to fiscal slippage in the years ahead. While the country is well positioned to withstand the storm, with a relatively low external debt burden and a sizeable stock of foreign reserves, the potential for deterioration in the country's macroeconomic buffers will temper investor perceptions of Colombia's sovereign creditworthiness. The government and the Fuerzas Armadas Revolucionarias de Colombia will eventually reach a deal to permanently end their armed conflict. However, the splintered nature of the left-wing insurgent group will ensure that the deal will only slowly improve the security environment.. Major Forecast Changes We expect interest rate cuts in 2017, as fading price pressures allow monetary policymakers to ease rates in order to support economic activity.

Table Of Contents

Colombia Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
FARC Peace To Offer Long-Term Benefits...................................................................................................................................8
The formal cessation of hostilities between the Colombian government and the Fuerzas Armadas Revolucionarias de Colombia (FARC)
will result in long-term improvements to the Colombian economy. Although security risks will remain, infrastructure development and
public works programmes will integrate more of the country into the national economy.
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
Fiscal Policy And Public Debt Outlook ................................................................................................................. 11
Fiscal Challenges Await Post-Conflict Colombia.......................................................................................................................11
The Colombian government will prioritise fiscal austerity after finalising the peace accord with the FARC. The fiscal deficit will narrow
slowly over the coming years as austerity measures are tempered by decreased revenue from commodity sectors and new spending on
the public works projects negotiated in the treaty.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................13
External Trade And Investment Outlook................................................................................................................ 14
Oil Rebound And Currency Weakness To Narrow Current Account Deficit............................................................................14
Colombia's current account deficit will narrow over the coming quarters, as higher commodity prices will provide a boost to goods
exports, while currency weakness will limit imports. However, the need for political and economic reforms to rebalance external
accounts away from oil dependency will prevent the deficit from reaching previous lows.
TABLE: 2016 OPERATIONAL RISK INDEX............................................................................................................................................................14
Outlook On External Position.................................................................................................................................. 15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................15
TABLE: TOP 5 GOODS EXPORTS.........................................................................................................................................................................16
TABLE : TOP 5 GOODS IMPORTS.........................................................................................................................................................................16
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................17
Monetary Policy ....................................................................................................................................................... 17
BanRep To Commence Easing In 2017.......................................................................................................................................17
Supply-side inflation pressures in Colombia will dissipate towards the end of 2016, paving the way for a gradual monetary easing cycle
to begin next year. We see no additional rate hikes for the foreseeable future after the central bank's decision in July to raise its policy
rate by 25bps to 7.75%, but have revised our interest rate forecasts to reflect no interest rate cuts this year and higher-than-expected
inflation in recent months.
TABLE : MONETARY POLICY FORECASTS.........................................................................................................................................................18
Monetary Policy Framework.................................................................................................................................... 18
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................19
Currency Forecast.................................................................................................................................................... 20
COP: Outlook To Remain Neutral Ahead Of Long-Term Strengthening..................................................................................20
The Colombian peso will continue to trade sideways for the remainder of 2016 as oil prices remain range-bound. Rising oil prices and
strengthening capital inflows will contribute to currency appreciation in 2017.
TABLE: BMI CURRENCY FORECAST....................................................................................................................................................................20
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
'No' Vote In Referendum Will Add To Uncertainty.....................................................................................................................28
The decades-long conflict between the Colombian government and the insurgent group FARC will formally end with a public referendum
on October 2, which will confirm the recently finalised peace deal. Although risks will remain, the conflict's end will support the
improvement of security and social stability in the country.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................28
TABLE: EXPECTED TIMELINE OF KEY EVENTS.................................................................................................................................................29
Long-Term Political Outlook................................................................................................................................... 30
Many Structural Challenges Ahead.............................................................................................................................................30
While Colombia's long-term political outlook is set to remain relatively stable compared with that of 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................................................................................................................... 33
SWOT Analysis......................................................................................................................................................... 33
Operational Risk Index............................................................................................................................................ 33
Operational Risk....................................................................................................................................................... 34
TABLE: OPERATIONAL RISK.................................................................................................................................................................................34
Business Crime........................................................................................................................................................ 35
TABLE: MAIN ACTIVE CRIMINAL GROUPS IN COLOMBIA..................................................................................................................................36
TABLE: BUSINESS RESPONSE TO RISK IN COLOMBIA.....................................................................................................................................37
Government Intervention ........................................................................................................................................ 39
TABLE: BUSINESS TAXES IN COLOMBIA............................................................................................................................................................39
TABLE: INCOME TAX RATE (FOR RESIDENTS)...................................................................................................................................................40
Chapter 5: BMI Global Macro Outlook................................................................................................... 43
Global Macro Outlook.............................................................................................................................................. 43
Broad Recovery But Three Notes Of Caution.............................................................................................................................43
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................43
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %....................................................................................................................................44
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...................................................................................................................................45
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................47

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