Colombia is gearing up for the second round of the presidential race to
be held on 17 June, in which right-wing candidate Iván Duque will face off
left-wing contender Gustavo Petro. Duque, a business-friendly candidate,
is still the favorite to clinch the presidency. On the economic front, the
recovery from the oil price shock of 2014–2015 is underway. The latest
release shows GDP expanded 2.2% year-on-year in the first quarter,
an acceleration from the previous quarter. Average growth in both retail
sales and industrial production rebounded in Q1. Retail sales picked up
throughout the quarter against a steady rise in consumer confidence and
low levels of inflation. Exports continued growing at a strong rate in the
first quarter, albeit losing some pace from the fourth quarter. Going into
Q2, consumer confidence entered positive territory for the first time in
over two years in April.
• The economy is expected to speed up this year, with growth being buoyed
in the medium-term by expansions in oil exploration activities, which
should benefit from higher oil prices. That said, reliance on oil exports
will leave the economy exposed to the same kinds of external shocks
that triggered a slowdown in 2015–2016. Investment in the non-oil sector
will therefore be essential to boosting growth. FocusEconomics panelists
expect GDP to grow 2.5% in 2018, which is unchanged from last month’s
forecast, and 3.0% in 2019.
• Inflation inched up to 3.2% in May from 3.1% in April, remaining within the
Central Bank’s target range of 3.0% plus or minus 1.0%. FocusEconomics
panelists expect inflation to end 2018 at 3.3% and 2019 also at 3.3%.
• At its latest meeting held on 27 April, Colombia’s Central Bank (Banco de
la República, BanRep) unanimously voted to cut the benchmark interest
rate by 25 basis points from 4.50% to 4.25%. This rate is the lowest since
July 2014 as the Bank continues its easing cycle in a bid to accelerate
growth. On average, our panelists expect further easing this year and see
the policy interest rate ending 2018 at 4.21%. They see it ending 2019
at 4.70%.
• On 8 June, the Colombian peso ended the day at 2,859 per USD, marking
a strengthening of 0.5% over the same day in May. Rising oil prices
and a brighter economic outlook have fueled upbeat sentiment for the
currency. The peso has also benefitted from carry trade and is expected
to be one of the best performing emerging market currencies this year.
FocusEconomics analysts forecast the peso ending 2018 at 2,915 per
USD and 2019 at 2,947 per USD. POLITICS | Colombia heads to a second-round presidential run-off, with
Duque expected to win
Following the first round of the presidential vote held on 27 May, in which
no one candidate captured more than half of the ballot, the two leading
candidates from the race—Iván Duque of the right-wing Democratic Centre
(Centro Democratico) and Gustavo Petro of the left-wing Colombia Humana
movement (Humana Colombia)—will face off in the second round set to take
place on 17 June. Duque is expected to clinch the presidency in the final
vote, having sustained a lead in the first round as well as in the polls. Given
his business-friendly stance, a victory for Duque would likely create a more
conducive environment for a faster pace of economic expansion while also
preserving macroeconomic stability.
Although the two candidates agree on certain points, such as slowing the
pace of trade liberalization and not signing more free trade agreements that
have failed to yield the intended benefits, their overall economic plans sit in
stark contrast. Duque’s agenda is business friendly and includes measures to
simplify the tax system for businesses and lower corporate taxes. Moreover,
Duque is expected to undertake an orthodox approach to managing the
economy and has signaled a reduction in public spending with a view to
maintaining fiscal neutrality from higher growth.
Petro, who is the first candidate from the far left to reach the second round
of the presidential race in years, has meanwhile campaigned on diversifying
the economy away from the oil sector and extractive industries to alternative
products. Among Petro’s other key policy proposals are restructuring
spending, instituting a tax overhaul and taxing non-productive land, as well
as focusing on public investment. He has proposed higher corporate taxes
and increased taxes for high-income earners to fund additional expenditure
in health and education. While the measures would help improve social
conditions and reduce inequality, a looser fiscal stance would worsen the fiscal
imbalances and steer the economy onto a more unsustainable debt path.
Petro’s unpopularity among investors would likely generate more economic
uncertainty and increase volatility in financial assets.
Whoever wins the election will be tasked with reversing the tide of lackluster
growth that has set in since oil prices fell sharply in 2014–2015. Austerity
measures introduced in the 2016 and 2017 budgets have also dented growth,
with the economy expanding at the slowest pace in eight years last year. A
slew of more upbeat data from the outset of the year suggests a turning point
for the economy, however, with the recovery expected to pick up on the back
of rising oil production amid higher oil prices, along with an upturn in demand
supported by lower inflation and interest rate cuts.
All in all, the race still looks set to be Duque’s to lose. His victory, which is
anticipated by the markets, would likely bode well for economic growth, attract
more investment and help sustain macroeconomic stability. Among the key
challenges for the new president will be addressing Colombia’s subdued
growth while consolidating fiscal imbalances, and the implementation of the
peace deal with FARC. Panelists participating in the LatinFocus Consensus
Forecast project that GDP will expand 2.5% in 2018, which is unchanged from
last month’s forecast. For 2019, panelists expect GDP will grow 3.0%.
REAL SECTOR | Economic recovery picks up in the first quarter
According to the latest GDP data released by the National Statistical Institute
(DANE) on 22 May, the economy grew 2.2% in the first quarter, picking up from a revised 1.8% figure in the final quarter of 2017 (previously reported:
+1.6% year-on-year). A pick-up in private consumption and government
spending drove the upturn. Meanwhile, economic growth in seasonallyadjusted,
quarter-on-quarter terms rose to 0.7% in Q1, up from 0.5% in Q4.
An important note is that this data release has changed the series base from
2005 to 2015, which means that past growth figures have been revised under
the new methodology.
Overall, domestic demand expanded at a weaker pace in Q1, growing 1.3%
year-on-year in the quarter compared to 2.1% in Q4. The downturn was
due to a sharp contraction in total investment, which offset accelerations in
both private consumption and government spending. Total investment fell
3.9% in the quarter after rising 0.6% in Q4. On the other hand, household
consumption grew 2.5% in annual terms amid lower level of inflation, following
an expansion of 1.2% in Q4. Government consumption soared 7.3% in the
first quarter, up from 4.8% in the previous quarter. Fixed investment data has
yet to be released.
While exports contracted again in the first quarter, they did so at a softer
pace. Exports fell 0.5% in Q1, following a more sizeable contraction of 3.7%
in Q4. Imports also fell, with the rate of decline moderating as well. In Q1,
imports dropped 1.7% after contracting 3.8% in the previous quarter. The
overall contribution of the external sector to growth was positive, as imports
contracted more sharply than exports.
While the economic recovery is underway and is expected to strengthen
on the back of higher oil prices in the coming quarters, a high fiscal deficit
continues to pose risks to long-term fiscal sustainability.
REAL SECTOR | Industrial production swings to contraction in March
According to data released by Colombia’s National Administrative Department
(DANE) on 11 May, industrial output contracted 1.4% over the same month
of the previous year in March, contrasting a 1.5% year-on-year expansion in
February.
Looking at a breakdown of the data, 26 out of the 39 industrial activities
recorded a decline, while the remaining 13 registered an expansion. Among
the notable drivers of the downturn were the categories of manufacture of
non-metallic mineral products; manufacture of pharmaceutical products,
medicinal chemicals; and manufacture of soaps and detergents, perfumes
and toilet preparations. Industrial activities that showed a pick-up included the
preparation of sugar and panela; preparation of beverages; and coking, oil
refining, and fuel blending.
Annual average growth in industrial production dropped down to minus 0.7%
in March from minus 0.2% in February.
Panelists surveyed for this month’s LatinFocus report expect industrial
production to expand 2.3% in 2018, which is up 0.1 percentage points from
last month’s forecast. For 2019, the panel expects industrial production to
increase 2.5%.
REAL SECTOR | PMI drops in May from April’s 19-month high
The seasonally-adjusted Davivienda manufacturing Purchasing Managers
Index (PMI) dropped to 51.1 in May after rising to a 19-month high of 52.1 in
April. The index moved closer to the critical 50-point threshold that separates
expansion from contraction in manufacturing output. Business conditions in the manufacturing sector continued to improve,
with sustained growth in order books, production, employment and input
purchasing, although the rate of expansion moderated in all cases due to
uncertainty arising from the presidential election and weaker-than-expected
sales. Output rose at the slowest pace in three months and the expansion
was driven by new business from both domestic and external markets.
Goods producers, however, remained optimistic about growth prospects,
with sentiment climbing to a survey-record high. Backlogs of work continued
to decline as firm hired additional workers, although the rate of job creation
weakened in the month. While input prices moderated in May, output charges
rose at the swiftest stride since last September as some firms passed on
the higher burden of cost adjustment onto consumers. Sentiment among
manufacturers was at the highest level in the survey history on expectations
that market conditions will improve after the elections; firms cited export
opportunities, new collections and business expansion plans as the main
potential growth drivers.
Commenting on May’s PMI reading, Andrés Langebaek Rueda, Chief
Economist Bolivar Group at Davivienda, stated:
“…everything seems to indicate that manufacturing activity will continue to
expand, that the slowdown observed in May corresponds to a temporary
phenomenon and that activity will continue with a good dynamic in the coming
months.”
OUTLOOK | Consumer sentiment enters optimistic territory for the first
time in almost two-and-a-half years
The Fedesarollo consumer confidence index climbed from minus 3.2 points in
March to 1.5 points in April. This marked the first time since November 2015
that the indicator has crossed the zero-point threshold separating optimism
from pessimism among consumers.
Four out of the five main sub-components of the index registered an upturn
in sentiment. Consumers’ perceptions on their future personal economic
situation improved, along with their views on the general economic situation
in the next 12 months. Moreover, consumers’ assessment on the country’s
economic conditions over the next year swung from negative into positive
terrain. Consumers also held more favorable views on purchasing big-ticket
items such as furniture and appliances. On the downside, consumers were
more pessimistic about their present financial situation compared to a year
ago.
LatinFocus Consensus Forecast participants expect private consumption to
expand 2.5% in 2018, which is unchanged from last month’s forecast. For
2019, the panel expects private consumption to increase 3.0%.
MONETARY SECTOR | Inflation edges up in May
According to the National Department of Administrative Statistics (DANE),
consumer prices increased 0.25% over the previous month in May, a softer
upturn compared to the 0.46% rise in April. Three out of the nine subcomponents
recorded sharper price increases from the previous month, two
recorded softer price increases, one came in flat, and two registered a fall in
prices. Prices for entertainment increased the most, while prices for clothing
and communications declined. Inflation ticked up to 3.2% in May from 3.1% in April. Consequently, it remained
within the Central Bank’s target band of 3.0% plus or minus 1.0%.
Core consumer prices—which exclude volatile items including fresh food and
fruit—ticked up 0.27% in May, following a revised 0.22% increase in April
(previously reported: 0.0%). Meanwhile, core inflation rose to 3.8% in May
after dropping to a revised 3.7% in April (previously reported: 3.8%).
Panelists participating in the LatinFocus Consensus Forecast expect that
inflation will end 2018 at 3.3%, which is unchanged from last month’s forecast.
For 2019, the panel also expects inflation to end the year at 3.3%.
EXTERNAL SECTOR | Export growth soars in April
According to the National Department of Administrative Statistics (DANE),
the annual pace of expansion in exports rocketed to 38.5% in April, up from
a meagre 1.4% in March. All three main product groups recorded robust
growth, rising at a double-digit rate. Exports of farming, food and beverages
rebounded, while exports of fuels and products of extractive industries, and
exports of manufacturing output accelerated markedly.
In March—the most recent month for which data is available—imports
contracted 5.3% year-on-year, which contrasted a 0.1% upturn in February. All
three main import groups, covering farming, fuels and manufactured goods,
registered a decline.
In annual terms, the trade deficit shrunk to USD 384.0 million in March from
USD 638.8 million from the same month of the previous year. March’s deficit
was smaller than the USD 494.2 million deficit recorded in February
Panelists participating in the LatinFocus Consensus Forecast expect that
exports will grow 11.1%, reaching USD 41.9 billion in 2018. Exports are seen
rising 5.3% to USD 44.2 billion in 2019.
FUENTE: Por Focus Economics https://www.focus-economics.com/ - En Barcelona España
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