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Colombia Country Risk Report Q2 2016

  • January 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views

Persistent weakness in benchmark crude oil prices will continueto undermine real export growth and fixed investment, helping tounderpin our view for structurally slower growth over the next severalyears.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.Hydrocarbons sector weakness will also weigh on Colombia's balanceof payments position.

Faltering oil prices and production willtemper investment 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.The government and Fuerzas Armadas Revolucionarias de Colombiawill reach a peace accord in H116, broadly in line with theirstated timeline. However, given the splintered nature of the left-winginsurgent group, such a deal will only slowly improve the securityenvironment.Major Forecast ChangesGreater than expected weakness in oil prices has prompted us torevise down our 2016 exchange rate forecast. We now forecastthe unit to average COP3,287/USD in 2016, from COP3,050/USDpreviously, and considerably weaker than the 2015 average ofCOP2,749/USD.Due to signs that inflation will remain well above the central bank'starget band in 2016, combined with the bank's stated willingness totighten monetary policy, we have revised up our policy rate forecastfor 2016. We expect the bank to raise the benchmark rate by 75basis points to 6.50% by end-2016.

Table Of Contents

Colombia Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Growth To Remain Subdued As Economy Struggles To Rebalance8
Colombian real GDP growth will remain relatively subdued in the years ahead, as a low oil price environment weighs on fixed
investment Real private consumption growth will also ease as the unemployment rate rises and persistent exchange rate weakness and
high inflation erode consumer purchasing power
GDP By Expenditure Outlook 9
TABLE: PRIVATE CONSUMPTION FORECASTS10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
Fiscal And Public Debt Outlook 11
Pullback In Spending Will Undermine Long-Term Growth Outlook11
Colombia's fiscal deficit will widen in 2016 as low oil prices and sluggish crude production weigh on revenues More challenging fiscal
dynamics will also dampen long-term growth, as government efforts to pare spending in light of weaker revenues reduces investment
into transport and agriculture
TABLE: FIXED INVESTMENT FORECASTS11
TABLE: NET EXPORTS FORECASTS11
Structural Fiscal Position 13
External Trade And Investment Outlook 15
Worst Is Past For Current Account, But Little Silver Lining15
Colombia's current account deficit will narrow gradually over the next several years, as imports decline further and the primary income
account shortfall moderates Nevertheless, with little to drive a strong rebound in exports, the current account shortfall will remain
structurally wider than in previous years
Outlook On External Position 17
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE17
Monetary Policy 18
Above-Target Inflation Will Keep Policy Rate On The Rise18
Colombia's Banco de la República will tighten monetary policy further in 2016, and to a greater extent than we previously expected
Currency weakness and elevated food prices will ensure that inflation remains well above target, forcing the bank to continue hiking
rates
TABLE: TOP 5 GOODS EXPORTS18
TABLE: TOP 5 GOODS IMPORTS18
Monetary Policy Framework 20
Currency Forecast 21
COP: Low Oil Prices Will Ensure Further Depreciation21
The Colombian peso will remain under depreciatory pressure in the coming months as persistently low oil prices keep the country's
terms of trade weak While the unit will reach a bottom in 2016, persistent headwinds for hydrocarbons exports and investment will see
the peso remain well structurally weaker in the next few years
TABLE: BMI CURRENCY FORECAST 21
Chapter 2: 10-Year Forecast 23
The Colombian Economy To 2025 23
Structurally Weaker Growth Following Oil Bust23
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
Agreement On Reparations Lends Peace Talks Additional Momentum28
The Colombian government's agreement with FARC on war victims' reparations, reached on December 15 2015, is an important step
towards a final peace deal in 2016 With the parties now having negotiated preliminary accords on two of the most difficult issues -
transitional justice and victims' reparations - there is significant momentum for a conclusion of the years-long peace talks in the coming
months
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
Trade Procedures And Governance 33
TABLE: LATIN AMERICA - TRADE PROCEDURES AND GOVERNANCE RISK 33
TABLE: LATIN AMERICA - TRADE PROCEDURES AND GOVERNANCE RISK (CONTINUED) 34
TABLE: IMPORT AND EXPORT DOCUMENTS34
TABLE: TRADE PROCEDURES BREAKDOWN34
Vulnerability To Crime 35
Chapter 5: BMI Global Macro Outlook 39
Global Macro Outlook 39
Unfinished Business In 201639
TABLE: GLOBAL ASSUMPTIONS39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %40
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %41
TABLE: COLOMBIA - MACROECONOMIC DATA and FORECASTS43

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