(2013!03!11) 4Q Eco Outlook Colombia

7/27/2019 (2013!03!11) 4Q Eco Outlook Colombia

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This report has been prepared by Banco BTG Pactual S.A.

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 7

Macroeconomic Research

Colombia

Sector-specific shocks and downward inflation surprises

Coincident indicators suggest that Colombia’s economy has recovered modestly from the sharp

and unexpected deceleration in 3Q12. When growth slowed to 4.75% y/y in 1Q12 and to 4.85%

in 2Q12 (from 5.9% in FY11), we thought the development represented a healthy cooling towards

the economy’s long-term potential (around 4.25%, in our view). However, in 3Q12, when GDP

contracted 0.65% q/q s.a.a.r., bringing growth to a sluggish 2.1% y/y, it stirred up considerable

uncertainty about the future. While the picture for 4Q12 is still incomplete (data will be released

on March 22), our calculations suggest that GDP expanded around 2.23% y/y, with a small

sequential advance.

The sudden downshift appears to be the fault of economic and institutional factors (some of them

temporary, but of unknown duration) – namely, lower investment in construction, a noticeable

slowdown in mining production, and persistent weakness in manufacturing.

Regarding construction, the greatest factor in the GDP surprise, there have been a number of

supply-side shocks: (i) ANI (National Agency for Infrastructure) delays in auctioning projects in

the 4th round of concessions, (ii) ANLA (environmental authority) delays in the authorization of

projects in the hydrocarbon and mining sector and (iii) delays created by the mayor of Bogotá,

who is blocking the installation of utilities in the city’s outskirts. In addition, a change in the way

the government pays public works contractors is producing a mechanical and temporary decline

in sector-specific measures of GDP. The combination of these factors has led to a 12.3% y/y

decline in construction, prompting a 1.6% y/y contraction in investment in 3Q12, which is likely to

have extended into 4Q12.

Quarterly Review

11 March 2013

www.btgpactual.com/research

Q1 Economic Outlook

A gradual recovery with low inflationRodrigo Valdés ● [email protected] ● +562 2490 5442 Juan Camilo Dauder ● [email protected] ● +574 356 7417



Macroeconomic Research ● Quarterly Review

Q1 Economic Outlook

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Chart 1: Construction vs Investment growth y/y (%) Chart 2: Cement dispatches vs. growth y/y (thnd tons,%)

Source: DANE, BTG Pactual. Source: DANE, BTG Pactual.

The manufacturing sector, which had already revealed weakness in previous quarters, has

continued to falter. According to some on the Street, industrial deceleration is an unfortunate

consequence of Dutch disease – an argument that has been gaining ground in Colombia given

the sharp rise in the production of hydrocarbons and minerals in recent years and the fact that it

has coincided with rising commodity prices internationally and a strengthening COP.

There is mixed evidence to support the importance of competitiveness to the relative decline in

manufacturing. Compared to global trade, which has substantially lost steam in the last few

months, non-traditional exports in Colombia do not look particularly weak, suggesting that some

sectors are adapting well. On the other hand, compared to global industrial production, Colombia

is losing ground more quickly, hinting at weakness in some import subsectors. Beyond externalcompetition, we believe there is a knock on effect from construction.

Though mining has led the slowdown in overall exports, the sector is expected to improve slightly

in 4Q12. Part of the problem was (i) a transportation bottleneck in the oil sector (due to delays in

the completion of the “Bicentenario” pipeline), which interrupted the development of higher levels

of production, (ii) delays in licenses to start exploratory wells, and (iii) the strike in the Prodeco

coal mine.

Chart 3: Manufacturing GDP vs. proxy y/y (%) Chart 4: Manufacturing GDP vs. proxy y/y (%)

Source: DANE, BTG Pactual Source: DANE, BTG Pactual.

The rest of the economy decelerated much less dramatically – especially consumption, which

expanded in line with its long-term potential, though it also decelerated slightly. We think this

trend will continue, given that the labor market remains tight (with unemployment s.a. at 10.1% in

January, well below the historical average) and that consumer confidence is still high.

-1.6

-12.3-20

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3040

Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12

Investment Construction

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2025

600650700750800850900950

1,000

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

Cement dispatches volume Growth (RHS)

-1.9

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20

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-1

Manufacturing GDP Manufacturing production proxy

1.8

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20

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

Mining GDP Mining proxy




Q1 Economic Outlook

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Chart 5: Commerce GDP vs. proxy y/y (%) Chart 6: 3 month average unemployment rate (%)


On the inflation front, there have been a few surprises in the last few months. Food and regulated

prices have fueled considerable disinflation, and core measures have gradually reflected the

emerging economic slack. From September 2012 to February 2013, headline inflation dropped

from 3.08% y/y to 1.83% y/y, the average of BanRep´s core inflation measures declined from

3.30% y/y to 2.49% y/y, food inflation slowed from 3.63% y/y to 1.19% y/y, and regulated goods

(including utilities and fuel) dropped from 3.32% y/y to 0.71% y/y. The latter two are explained by

stable energy prices, softening world food prices (e.g., the CRB food index) and favorable

weather conditions.

Chart 7: CRB food COP$ 3 month lead vs. CPI food (%) Chart 8: Energy Comp COP$ 3 month lead vs. Regulated CPI food (%)


Outlook: A gradual recovery

What to expect in 2013? We think some of the problems faced by construction are still present

and will take a few months to clear. Environmental licensing of hydrocarbons and mining projects

has not advanced significantly, and the restrictions on utilities in Bogota look to be part of city

planning. In the meantime, the government is still advancing its initiative of providing 100,000

new, free houses that, together with renewed momentum from a new auction of highways and

roads starting in 2Q13, should promote a gradual recovery in the construction sector and in

investment.

Weakness in industrial production is unlikely to improve dramatically, given the COP’s strength

and the country’s global partners, which are still growing slowly. However, we do not see any

clear reasons to expect further deterioration either. For mining, exports in 1Q13 will be hurt by

some non-recurring factors, such as the interruption of the operating license for the Drummond

3.3

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10

1520


Commerce GDP Commerce proxy

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13

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

3m avg unemployment rate 3m avg unemployment rate s.a

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60

Dec-06 Dec-08 Dec-10 Dec-12

CRB food COP$ 3-mth lead CPI Food (RHS)

0

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-90

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60

110

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

Energy Comp 3 -mth lead Regulated CPI y/y (RHS)




Q1 Economic Outlook

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coal project, the strike at the Cerrejon coal mine (issues at these two mines subtracted 70% of

the country’s total coal production in February), and the strike among coffee growers and workers

in several other agricultural subsectors, the impact of which is difficult to measure.

But there are some positive signs as well. First and foremost, monetary policy easing should start

to have an effect, more so if combined with favorable external financial conditions. BanRep has

already cut 150bps from the monetary policy rate, lowering ex-ante real interest rates. In addition,

we should see higher investment at the regional government level and, more generally, a largely

neutral effect from fiscal policy; after it created a sizeable setback in 2012 (at least according to a

recently published article IV from the IMF).

In short, our new baseline scenario has GDP growing 3.7% y/y in 2013 and 4.8% in 2014 (from

3.5% in 2012). We assume that the economy will expand sequentially at around its long-term

potential growth starting in 2Q13 and accelerate in 2014, implying that the output gap that hasopened in the last 2 quarters will linger for a while. We believe we are unlikely to see a reduction

in economic slack until 2014.

We think core inflation measures will remain well below the 3% target, with BanRep´s average

core inflation dropping even further to around 2% in 3Q13. Headline inflation, in turn, should start

gradually normalizing as food and energy shocks unwind. We expect the headline to come in at

2.31% at the end of 2013 and 2.91% at the end of 2014, with average core inflation at 2.21% in

December 2013.

Chart 9: Headline inflation vs. average core and target y/y (%)

Source: DANE, BanRep, BTG Pactual.

Amidst this scenario, we expect BanRep to ease monetary policy further, specifically via a 2 x

25bps cut, with risks tilted towards an additional cut. In our previous call (see February Monetary

Policy Meeting “Expecting another 25bps cut”, released on February 19), where we anticipated

the cut that took place in February and forecast an additional cut (with risks leaning toward more

reductions), we used an estimated reaction function to argue that the policy rate could be lowered

to 3.5%. That call was to some extent based on a reaction function fed by the macro scenario

contained in the inflation report presented by Governor Uribe on February 8. If we use our new

baseline scenario and the same reaction function, the result suggests that the easing cycle will

bring the intervention rate to 3%, with the last cut to take place in 4Q13, before a reversion inearly 2014. In our view, this model may not be practical, as it implies that the Central Bank will

decide to keep the interest rate constant for only a short a period of time. Instead, we think the

Central Bank will adopt a less aggressive policy and believe it will only make 2 more 25bps cuts,

bringing the rate to 3.25%.

2

3

5

6

8

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Headline CPI Inflation Average Core CPI Inflation Target




Q1 Economic Outlook

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BanRep statements are also consistent with further cuts. While the Central Bank has already

reduced the policy rate by 150bps and is getting closer to the post-Lehman minimum

(intervention rate of 3%), it has stressed that, given the decline in inflation expectations, the realinterest accommodation has been less significant. Moreover, in the last three statements, it has

made clear that output is below potential and its inflation forecast is below the 3% target. We are

of the view that as long as this evaluation regarding inflation persists, we can expect further

easing. The last set of minutes published on Friday, March 8, also suggest that the easing cycle

is not yet coming to an end.

Chart 10: Core CPI acceleration vs Output gap (%) Chart 11: MPR Taylor Rule approach (%)

Source: DANE, BanRep, BTG Pactual. Source: DANE, BanRep, BTG Pactual.

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Core CPI acceleration Output gap m.a (RHS)

1

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2000 2002 2004 2006 2008 2010 2012 2014

Intervention rate Policy Rule +/- 2 S.E.




Q1 Economic Outlook

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Table 1: Summary of forecasts

Source: DANE, BanRep, BTG Pactual.

Period 2010 2011 2012E 2013E 2014ENational accounts

GDP (COP$tn) Current Prices 543.7 615.7 654.2 697.0 750.6

GDP (US$bn) 286.9 319.5 353.1 390.8 419.4

GDP per capita (US$) 6,304 6,940 7,581 8,294 8,799

Real GDP (%, y/y) 4.3 5.9 3.5 3.7 4.8

Demand side breakdown

Domestic Demand (%, y/y) 5.6 8.8 3.9 3.5 5.2

Private consumption (% , y/y) 5.0 6.5 4.4 4.0 4.6

Total Investment (% , y/y) 7.3 17.2 2.5 3.8 7.7

Government spending (%, y/y) 5.5 2.6 4.3 4.4 3.6Net exports (%, contrib) -2.0 -3.1 -1.0 -0.4 -0.9

Exports (%, y/y) 1.3 11.4 3.7 3.3 5.3

Imports (%, y/y) 10.5 21.5 6.2 3.5 6.7

Labor market

Unemployment (% , average) 11.8 10.9 10.2 10.3 10.1

Balance of payments

Trade balance (US$bn) 1.5 5.4 4.9 4.9 4.3

Merchandise exports (US$bn,fob) 39.8 57.4 60.7 62.7 66.0

Merchandise imports (US$bn,fob) 38.4 52.0 55.8 57.7 61.7

Current account (US$bn) -8.8 -10.0 -12.2 -12.4 -12.9Current account (% of GDP) -3.1 -3.0 -3.4 -3.2 -3.1

Prices, interest & exchange rates

CPI (% , y/y, eop) 3.2 3.7 2.4 2.3 2.9

Average Core CPI (% , y/y, eop) 2.9 3.4 2.9 2.2 3.0

US$ exchange rate (eop) 1,916 1,939 1,767 1,800 1,780

US$ exchange rate (Average) 1,980 1,927 1,853 1,784 1,790

Central Bank Rate (% , eop) 3.00 4.75 4.25 3.50 4.50




Q1 Economic Outlook

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Analysts

Eduardo LoyoChief Economist

[email protected]

+55 21 3262 9707

Claudio Ferraz

Head – Brazil, Mexico

[email protected]

+55 21 3262 9758

André Batista

[email protected]

+55 21 3262 9843

Danilo Igliori

[email protected]

+55 21 3262 9059

Bernardo Mota

[email protected]

+55 21 3262 9660

Camille [email protected]

+55 21 3262 8883

Rodrigo Valdés

Head – Chile, Colombia, Peru

[email protected]

+562 2490 5442

Mario Arend

[email protected]

+562 2713 4903

Juan Camilo Dauder

[email protected]

+574 356 7417

Hedmond Rios

[email protected]

+562 2713 4807

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Q1 Economic Outlook

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(2013!03!11) 4Q Eco Outlook Colombia