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Colombia - Economic Briefing October 2002

Economy Rebounds but Shadows on the Horizon

The economy rebounded in the first half of the year, as exports accelerated and consumption improved. Nevertheless, the looming prospects for fiscal adjustment, uncertain outlooks of economic recovery for key export destinations and slowing consumption indicate that the pick up in economic activity may have been short-lived. Finally, the heightened currency depreciation may prompt monetary tightening if an inflationary pass-through to domestic prices materializes.

Growth propelled by healthier external sector and higher consumption
On 2 October, the National Statistical Department (DANE) confirmed its preliminary second quarter gross domestic product (GDP) growth figure of 2.2% published in August. The external sector was the key driver behind the second quarter growth. Exports accelerated to 3.7% growth over the same quarter last year, which represented a substantial improvement compared to the 0.8% contraction observed in the first quarter. Imports grew at a much more moderate 0.2% pace. Exports of coffee and oil rose at annual rates of 8.1% and 13.1% respectively in the second quarter. However, non-traditional exports provided an even more pronounced boost to the external sector. According to national accounts data, unrefined sugar, glass product, chemical goods and plant exports rose 81.2%, 35.1%, 32.6% and 23.6% respectively for the same period.

Consumption experienced a small uptick with growth increasing to 1.9% in the second quarter from 1.8% in the first quarter. Public sector consumption drove the second quarter pick-up with a 3.0% expansion, while household consumption grew at a more moderate 1.5% pace. Investment remained in negative territory with a 0.3% contraction in the second quarter, which, nevertheless, represented a substantial improvement from the 12.6% contraction observed in the first quarter. The improvement of investment over the first quarter was driven by construction and transport equipment, but the improvement in these categories was insufficient to offset declines in machinery equipment production and civil works projects.

According to more recent data, economic growth may have begun to slow down in the third quarter. Real retails sales growth slowed from 4.1% in June to 3.2% in July and industrial production is also showing signs of a deceleration. According to the National Industry Association (ANDI), industrial output expanded a modest 1.4% from January through July over the same period last year. The July figure came in below the June figure of 1.5% and remained well below the 2.7% growth registered in April and May.

As a result, participants expect GDP growth in the third quarter to have slowed to 1.8% over the same quarter last year and to remain subdued in the final quarter. Therefore, GDP growth for the year as a whole is anticipated to remain modest this year but within the government’s estimate of 1.2 - 1.5%. High unemployment (18.1% in August) and tight credit are likely to remain key impediments to more robust growth rates. In addition, the deepening recession in Venezuela and uncertain growth prospects in the United States may dampen any pronounced export recovery, while the inflationary pass-through from the weakening exchange rate may force the Central Bank to tighten monetary reins and further stifle economic growth prospects.

Government pressing for stand-by agreement with IMF in face of adverse fiscal picture
The government is currently drafting its letter of intent to be submitted to the International Monetary Fund (IMF) by the end of October. The Fund has already indicated that Colombia is unlikely to receive the same scope of support under the new agreement. Preliminary estimates place the amount of the new stand-by loan at US$ 1.0 billion, which is well below the previous amount of US$ 2.8 billion. Furthermore, officials of the multilateral institution have indicated that the term is likely to be cut from the prior three-years to just two or two and a half years. The letter of intent is expected to include commitments to tax; pension and state reform in addition to firm commitments toward lowering the fiscal deficit. The government has admitted that the fiscal deficit is likely to exceed the 2.6% of GDP target agreed to with the IMF and may reach over 4.0% of GDP this year. The successful completion of negotiations with the Fund is considered key to the sustainability of the current fiscal situation, since renewal will provide access to some US$ 5 billion in multilateral loans over the next three years and is considered essential to help ease borrowing requirements next year.



 

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Colombia.  For more details please click here.

 

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