Since 2014 Colombia has been in the frontline of the strong external shock resulting from the collapse of global commodity prices, notably for oil. Its macro fundamentals deteriorated markedly up to early 2016 (i.e. a widening of twin deficits, a sharp depreciation of the Colombian peso and a surge in inflation), but economic growth has remained decent, driven by consumption. The macro rebalancing is not over and should continue in the coming quarters. Meanwhile, two key political achievements occurred in late 2016: the signing of the peace agreement with FARC, and the adoption of fiscal reform. These elements pave the way for brighter medium-term macro prospects, while economic growth should remain lacklustre in the short term.
Macro adjustment and rebalancing
From 2003 to 2013, strong economic growth was fuelled by high commodity prices. Colombia faced the risk of the so-called “Dutch disease” with commodities accounting for a growing share of the economy and the peso appreciating at the expense of other exports’ competitiveness. Since 2014 the country has been undergoing a major adjustment due to the strong headwinds resulting from low commodity prices, mainly for oil. The peso (COP) experienced one of the world’s sharpest depreciations against the US dollar in 2015 before appreciating by 5% in 2016.
Real GDP growth slowed to a still-decent rate of 2.0% in 2016, its lowest level since 2009, driven by a sharp contraction in investment (-4.5%). Private consumption was the main contributor to economic growth. But it lost some steam, increasing by only 2.0% compared with almost 5% on average from 2011-15. Labour market conditions have deteriorated, while monetary policy tightening in order to curb inflation prevented credit from rising at an annual double-digit pace as it had from 2010-2015. A slight fall in exports (-0.9%) was offset by a steep decline in imports (-6.1%), leading to a positive contribution to GDP growth from external trade. The oil and mining industry faced strong headwinds. The sector’s output fell by 6.5% in 2016, driven down by hydrocarbons: oil output dropped by 12% last year, to 885k barrels/day. Meanwhile, manufacturing, construction and services performed rather well and agricultural output was broadly stable.
To read the entire report Please click on the pdf File Below
by Sylvain BELLEFONTAINE