FGV / IBRE - Colombia under the new global economic conditions

América Latina

Colombia under the new global economic conditionsRoberto Steiner | 2014

A AMÉRICA LATINAE AS NOVAS CONDIÇÕESECONÔMICAS MUNDIAIS

seminário

Roberto Steiner Fedesarrollo Rio de Janeiro September 19, 2014

Colombia under the new global economic conditions

Colombia: For now, not much has changed

o Stability in the prices of its most relevant commodities: The price of oil has been stable; the price of coffee has gone up

o Favorable financial conditions: Capital inflows have remained buoyant and a strong peso continues to be a matter of concern o Inflation remains on target, growth is robust and

unemployment, though high, has declined continuously since December 2012

o Of concern, a weakening fiscal and current account outlook in the context of tightening financial conditions

o Stability in the prices of the most relevant commodities: The price of oil has been stable; the price of coffee has gone up

o Favorable financial conditions: Capital inflows have remained strong and a strong peso continues to be a matter of concern o Inflation continues to be on target, growth remains

robust and unemployment, though high, has declined continuously since December 2012

o Of concern, a weakening fiscal and current account outlook

In a context of declining commodities prices…

Source: World Bank, Valores Bancolombia.

80

120

160

200

240

ago-1

1

feb-1

2

ago-1

2

feb-1

3

ago-1

3

feb-1

4

In

de

x (

Ja

n 2

, 2

00

8=

10

0)

Gold

0

40

80

120

160

200

240

280

320

360

ago-1

1

feb-1

2

ago-1

2

feb-1

3

ago-1

3

feb-1

4

ago-1

4

Ind

ex

(Ja

n 2

, 2

00

8=

10

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Iron ore

40

50

60

70

80

90

100

110

120

130

ago-1

1

nov-1

1

feb-1

2

may-1

2

ago-1

2

nov-1

2

feb-1

3

may-1

3

ago-1

3

nov-1

3

feb-1

4

may-1

4

ago-1

4

Ind

ex

(Ja

n 2

01

1 =

10

0)

Soybeans

60

80

100

120

140

160

sep-1

1

dic

-11

mar-

12

jun-1

2

sep-1

2

dic

-12

mar-

13

jun-1

3

sep-1

3

dic

-13

mar-

14

jun-1

4

sep-1

4

Ind

ex

(J

an

2,

20

08

=1

00

)

Copper

…the most relevant for Colombia are doing OK

20

40

60

80

100

120

140

sep-1

1

ene-1

2

may-1

2

sep-1

2

ene-1

3

may-1

3

sep-1

3

ene-1

4

may-1

4

sep-1

4

Brent Oil

In

de

x (

Ja

n 2

, 2

00

8=

10

0)

0

50

100

150

200

250

sep-1

1

ene-1

2

may-1

2

sep-1

2

ene-1

3

may-1

3

sep-1

3

ene-1

4

may-1

4

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4

Ind

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(Ja

n 2

, 2

00

8=

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0)

Coffee

Source: Valores Bancolombia – Federación Nacional de Cafeteros.

o Stability in the prices of its most relevant commodities: The price of oil and coal has been quite stable and the price of coffee has one up

o Favorable financial conditions: Capital inflows have remained buoyant and a strong peso continues to be a matter of concern o Inflation continues to be on target, growth remains

robust and unemployment, though high, has declined continuously since December 2012

o Of concern, a weakening fiscal and current account outlook

FDI remains very strong

16.772

10.573

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

0

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.0002000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014*

Left axis, USDMM % GDP

* Data until August 2014. Source: Balanza cambiaria – Banco de la República.

Portfolio capital inflows, higher than ever

Monthly averages of Foreign Portfolio Investment

Period USD Millions

2007-2010 49

2011 219

2012 273

2013 391

2014 (Jan-Aug) 1.216

117

535

1.999

914 1.020

1.680

2.273

1.194

(500)

0

500

1.000

1.500

2.000

2.500

ene-1

4

feb-1

4

mar-

14

abr-

14

may-1

4

jun-1

4

jul-14

ago-1

4

Foreign Portfolio Investment 2014

US

D M

illi

on

s

Note: Data for the latest month are preliminary (to August 29). Source: Balanza cambiaria – Banco de la República.

Main reasons for robust K inflows:

1) A tax benefit in the 2012 tax reform and simplifications in the taxation of foreign investors

• Tax reform (Law 1607, 2012): Reduction of the tax on foreign portfolio investments from 33% to 14% --or 25% if coming from tax havens

• Decree 2218 of October 2013 simplified the withholding tax, to be made only when investors receive coupon payments or sell the financial instrument --before, there were monthly withholdings

2) The rebalancing of the JP Morgan Index

• Increased weight of Colombian local public debt:

The GBI-EM Global Diversified (from 3.2% to 8%), the GBI-EM Global (1.81 % to 5.6%) and the Global Diversified Index 15% (from 3.07% to 8.26%). The latter is the most important reference; 90% of the amount indexed to JP Morgan indexes belong to this specific reference.

• The transition to the new weights is gradual, between May and September

• An initial estimate is that around USD 196 billion were indexed to the GBI-EM Global Diversified; this could imply additional K inflows to Colombia of around USD 9 billion

Increased (observed & expected) K inflows have led to a strong appreciation of the peso, only partially

reversed in the past two months

Source: Banco de la República.

1.750

1.800

1.850

1.900

1.950

2.000

2.050

2.100

0

10

20

30

40

50

60

28-f

eb-1

314-m

ar-

13

28-m

ar-

13

11-a

br-

13

25-a

br-

13

09-m

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323-m

ay-1

306-j

un-1

320-j

un-1

304-j

ul-13

18-j

ul-13

01-a

go-1

315-a

go-1

329-a

go-1

312-s

ep-1

326-s

ep-1

310-o

ct-1

324-o

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307-n

ov-1

321-n

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305-d

ic-1

319-d

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302-e

ne-1

416-e

ne-1

430-e

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413-f

eb-1

427-f

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413-m

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27-m

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24-a

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08-m

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422-m

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405-j

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419-j

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403-j

ul-14

17-j

ul-14

31-j

ul-14

14-a

go-1

428-a

go-1

4

$/U

SD

US

D M

illi

on

s

Dialy Exchange Intervention Representative Market Rate (Right Axis)

o Stability in the prices of its most relevant commodities: The price of oil and coal has been quite stable and the price of coffee has one up

o Favorable financial conditions: Capital inflows have remained strong and a strong peso continues to be a matter of concern o Inflation remains on target, growth is robust and

unemployment, though high, has declined continuously since December 2012

o Of concern, a weakening fiscal and current account outlook

Source: Banco de la República.

Inflation has accelerated slightly but remains near the mid-point of the target range

0

1

2

3

4

5

6

7

8

may-0

9

jul-09

sep-0

9

nov-0

9

ene-1

0

mar-

10

may-1

0

jul-10

sep-1

0

nov-1

0

ene-1

1

mar-

11

may-1

1

jul-11

sep-1

1

nov-1

1

ene-1

2

mar-

12

may-1

2

jul-12

sep-1

2

nov-1

2

ene-1

3

mar-

13

may-1

3

jul-13

sep-1

3

nov-1

3

ene-1

4

mar-

14

may-1

4

jul-14

sep-1

4

%

Annual Inflation Core Inflation One year expectations

Growth has been strong (close to 5.8% on average since mid-2013)

Source: FMI-WEO actualización Julio de 2014. Official statistics of the Central Banks and Statistical Institutes of each country.

Country

Annual Growth, %

2013-I 2013-IV 2014- I 2014-II

Colombia 2,9 5,3 6,5 4,3

Brasil 1,9 2,2 1,9 1,4

México 0,6 0,7 1,8 1,6

Perú 4,6 6,9 5,1 1,7

Venezuela 0,8 1 -4,5 -4,0

Chile 4,9 2,7 2,4 1,9

Ecuador 3,6 5,2 4,9 _

6,5

4,3

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

9,0

mar-

10

jun-1

0

sep-1

0

dic

-10

mar-

11

jun-1

1

sep-1

1

dic

-11

mar-

12

jun-1

2

sep-1

2

dic

-12

mar-

13

jun-1

3

sep-1

3

dic

-13

mar-

14

jun-1

4

%

Colombia: Annual GDP Growth

Growth and a reduction in non-wage labor costs have led to a decline in unemployment & labor informality

Source: DANE.

12,6 12,7

11,5

10,9

9,9

9,3

6

7

8

9

10

11

12

13

14

15

jul-09

nov-0

9

mar-

10

jul-10

nov-1

0

mar-

11

jul-11

nov-1

1

mar-

12

jul-12

nov-1

2

mar-

13

jul-13

nov-1

3

mar-

14

jul-14

%

Unemployment Rate

52,6

51,9

51,4 51,8

49,2

48,1

46

48

50

52

54

jun-0

9

oct

-09

feb-1

0

jun-1

0

oct

-10

feb-1

1

jun-1

1

oct

-11

feb-1

2

jun-1

2

oct

-12

feb-1

3

jun-1

3

oct

-13

feb-1

4

jun-1

4

Proportion of the population in informal employment

(13 cities, moving quarters)

%

Tax Reform

Together with robust economic activity, the rise in inflation has brought about a 125 bp increase in the central bank policy rate

of interest since May

3,25

4,5

0,0

2,0

4,0

6,0

8,0

10,0

12,0

sep-0

8

ene-0

9

may-0

9

sep-0

9

ene-1

0

may-1

0

sep-1

0

ene-1

1

may-1

1

sep-1

1

ene-1

2

may-1

2

sep-1

2

ene-1

3

may-1

3

sep-1

3

ene-1

4

may-1

4

sep-1

4

%

Source: Banco de la República.

o Stability in the prices of its most relevant commodities: The price of oil and coal has been quite stable and the price of coffee has one up

o Favorable financial conditions: Capital inflows have remained strong and a strong peso continues to be a matter of concern o Inflation continues to be on target, growth remains

robust and unemployment, though high, has declined continuously since December 2012

o Of concern, a weakening fiscal and current account outlook in the context of tightening financial conditions

Foreign Trade Dynamics

13,2

15,6

6,2

4,5

0

2

4

6

8

10

12

14

16

18

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

% G

DP

Export growth

Total Non Traditionals

11,4

15,0

0

2

4

6

8

10

12

14

16

18

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

% G

DP

Import growth

Source: Banco de la República.

Nominal and real exchange rate

1550

1600

1650

1700

1750

1800

1850

1900

1950

2000

2050

2100

28-m

ar-

13

28-j

un-1

3

28-s

ep-1

3

28-d

ic-1

3

28-m

ar-

14

28-j

un-1

4

US

D M

illi

on

s

Nominal Exchange Rate

70

75

80

85

feb-1

3

abr-

13

jun-1

3

ago-1

3

oct

-13

dic

-13

feb-1

4

abr-

14

jun-1

4

ago-1

4

Ind

ex

(Ja

n 1

99

4=

10

0)

Real Exchange Rate

Source: Banco de la República.

Trade Balance and Current Account Deficit (% of GDP)

2,2

0,3

0,1 0,1

1,0 0,9

-0,1

-0,4

0,2

0,7

0,5

1,6

1,1

0,6

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

% G

DP

Trade Balance

*Fedesarrollo forecast. Source: Banco de la República.

4,7

3,7

-1,5

-0,5

0,5

1,5

2,5

3,5

4,5

5,5

6,5

7,5

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014*

% o

f G

DP

Current Account - FDI

FDI Current Account Deficit

The fiscal deficit has stabilized

-3,9

-2,8

-2,3 -2,4 -2,4

-1,1

-0,1

0,2

0,0

-4,5

-4,0

-3,5

-3,0

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

2010 2011 2012 2013 2014

% G

DP

Central Government

Total Fiscal Balance Primary Fiscal Balance

Source: Ministry of Finance.

The Medium Term Fiscal Framework acknowledges a decline in the oil sector´s contribution to the budget

Source: Ministerio de Hacienda.

2,5

1,8 2,0 2,0 2,0

1,8

1,7

0,0

0,5

1,0

1,5

2,0

2,5

3,0

2014 2015 2016 2017 2018 2019 2020

% G

DP

Oil Revenues

And there are additional expenditure needs, as recently recognized by the government

Yearly expenditure above what is in the latest Medium Term Fiscal Framework:

1. Agricultural and Rural Development: Could be 1% of GDP higher if a peace agreement is finalized

2. Health: Conservative estimates call for additional expenditure of 0.8% of GDP

3. Quality of education: A study by “Fundación Compartir” suggests additional expenditures of 0.3% of GDP

4. Early Childhood: A “Fundación Éxito” report estimates additional expenditure of 0.4% of GDP

5. Pensions: Fedesarrollo estimates additional outlays of 0.3% of GDP

-2,4 -2,4 -2,3 -2,2 -2,1 -2,0 -1,9 -1,6 -1,4 -1,2 -1,0 -0,8

-3

-2,5

-2

-1,5

-1

-0,5

0

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023%

of

GD

P

Structural Balance of CG

There is a strong commitment to fiscal discipline (FISCAL RULE)

Structural Deficit Targets 2014: 2,3% of GDP 2018: 1,9% of GDP 2022: 1,0% of GDP

Source: Ministry of Finance.

“Article 5° Fiscal Rule. (…) the National Government will enforce an annual decreasing path for the Structural fiscal balance” Law 1473 of 2011.

In short, the fiscal outlook raises important concerns

• Overall, expenditure needs may be 2% of GDP higher than what is in the MFMP

• Political economy considerations point towards the increase in several business-unfriendly taxes (corporate income tax, wealth tax, FTT)

• At this stage, FEDESARROLLO forecasts growth at 4.1-4.7% in 2014 and at 4.1-5.9% in 2015