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Macroeconomic Outlook for ColombiaBBVA 5th Latin America Local Markets Conference
Carolina SotoMember of the Board of DirectorsJanuary 2019
*These opinions are personal and do not represent the official position of the Banco de la República or its Board of Directors.
1
17/0
1/20
19
2
Co
nte
nts
Long-term Trends in Colombia
Recent Developments in the Colombian Economy
Policy Responses and Challenges
Financial System
Dealing with Increased External Volatility
Source: DANE, Banco de la República 3
• Colombia has gained important benefits after the adoption of sound economic policies in recent decades.
• Inflation and its volatility decreased notoriously with the inflation targeting regime.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Dec-70 Dec-74 Dec-78 Dec-82 Dec-86 Dec-90 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10 Dec-14 Dec-18
Annual Inflation Rate in Colombia
Annual Inflation Rate
Inflation Target
Inflation Targeting
Source: Banco de la República 4
• The positive results of the inflation targeting regime were possible due to a successful implementation of monetary policy.
0%
10%
20%
30%
40%
50%
60%
70%
Interest Rates in Colombia
Minimum contraction rate
Monetary Policy Rate
Maximum Expansion Rate
Interbank Rate
Inflation Targeting
0
500
1.000
1.500
2.000
2.500
3.000
3.500
Jan-82 Jan-86 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 Jan-14 Jan-18
Exchange Rate - Monthly Average
CO
P/U
SD
CrawlingPeg
Exchange rate target
zones
Inflation Targeting(Exchange rate
flexibility)
5
• Growth remains remarkably stable over time compared to other countries in the region.
Source: International Monetary Fund. Calculations by Banco de la República
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
Last 30 years Last 20 years Last 10 years Last 5 years
Average Annual GDP Growth RateArgentina
Brazil
Chile
Colombia
Ecuador
Mexico
Paraguay
Peru
6
• And macroeconomic stability, along with improved security and favorable external conditions, has in turn allowed for higher investment and higher levels of foreign direct investment.
Source: Departamento Administrativo Nacional de Estadística - DANE
14,3%
16,7% 16,8%
23,1%
0%
5%
10%
15%
20%
25%
1980-1989 1990-1999 2000-2009 2010-2018
Investment(Real, % GDP)
0,9%
1,8%
3,6%
4,1%
0%
1%
2%
3%
4%
5%
1980-1989 1990-1999 2000-2009 2010-2017
FDI(% of GDP)
Source: Banco de la República – Balance of Payments
7
• Fiscal policy has also improved thanks to lower deficits and the establishment of a fiscal rule.
Source: Ministry of finance
-2,6%
-3,8%
-3,1%
-4%
-3%
-2%1990-1999 2000-2009 2010-2018
Central National Government Balance(% PIB)
14,4%
39,0% 38,6%
10%
15%
20%
25%
30%
35%
40%
1990-1999 2000-2009 2010-2017
Net Debt of the Central National Government(% of GDP)
Source: Ministry of finance
8
• Colombians have benefited from the stable macroeconomic environment as shown by the consistent reduction in the unemployment rate since the year 2000.
• On the other hand, labor informality is still an important challenge, despite improvements achieved during the last decade.
Source: Departamento Administrativo Nacional de Estadística - DANE
20,2%
10,5%
6%
8%
10%
12%
14%
16%
18%
20%
22%
Unemployment Rate(yearly moving average – seven metropolitan areas)
46,7%
43%
44%
45%
46%
47%
48%
49%
50%
51%
52%
53%
54%
Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18
Informal employment(quarterly moving average)
9
• The improvements in the labor market, together with the reduction of poverty and inequality, allowed for the consolidation of the middle class.
* For the 1990s: 1992, 1996 and 1999. For the 2000s: all decade except 2006 and 2007.Source: World Bank
0,560,55
0,53
0,45
0,47
0,49
0,51
0,53
0,55
0,57
1990s* 2000s* 2010-2016
Gini Coefficient
15,2%
12,8%
5,7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1990s 2000s 2010-2016
Poverty headcount ratio at $1.90 a day(% of population)
10
• Overall, the quality of life for households has improved through higher access to public services and lower violence levels.
*For the 1990’s: 1993 and 1997 surveys. For the 2000’s: 2003 and 2008 surveys.Source: DANE. Encuesta nacional de calidad de vida.
97,7%
88,6%
76,1%
59,3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Electricity Water supply Sewage Network Natural Gas
Access to Public Services(% of total households)
1990's* 2000's* 2010-2017
42,8
67,6
49,6
30,9
0
10
20
30
40
50
60
70
80
1980-1989 1990-1999 2000-2009 2010-2016
Homicide Rate(homicides by 100,000 people)
Source: Medicina Legal and World Bank
17/0
1/20
19
11
Co
nte
nts
Long-term Trends in Colombia
Recent Developments in the Colombian Economy
Policy Responses and Challenges
Financial System
Dealing with Increased External Volatility
• The Colombian economy faced higher volatility in its terms of trade during the last year.
Source: U.S Energy Information Administration (EIA)
12
0
10
20
30
40
50
60
70
80
90
100
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
Oil Prices (Brent, WTI)
WTI
Brent
USD
/Bar
rel
USD
/Bar
rel
20
30
40
50
60
70
80
90
100
Jan-18 Apr-18 Jul-18 Oct-18 Jan-19
WTI
Brent
USD
/Bar
rel
USD
/Bar
rel
• The Colombian economy faces higher volatility in its terms of trade.
Source: Bloomberg - Citigroup ToT Index
13
0
20
40
60
80
100
120
140
nov.-13 nov.-14 nov.-15 nov.-16 nov.-17 nov.-18
Terms of Trade (Jan2014 = 100)
Colombia Peru
Mexico Argentina
• Although Colombia’s credit risk remains at historically low levels, its volatility has increase recently.
Source: Bloomberg.
14
0
50
100
150
200
250
300
350
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
5-Year CDS
Peru Colombia Mexico Chile
0
50
100
150
200
250
Jan-18 Jul-18 Jan-19
• …Amid a global financial tightening.
Source: Bloomberg, calculations by Banco de la República 15
0%
1%
2%
3%
4%
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
Interest Rates in the United States
10-year yields
Federal Funds Target Range Upper Value
• While the growth of trading partners is expected to slowdown.
¹ USA, Euro area, China, Brazil, Ecuador, Peru, México, Chile. Weighted by non-traditional exports.
* Exports growth figure available up to 2013-Q3
Source: Banco de la República and Departamento Administrativo Nacional de Estadística - DANE
16
2.8% 2.8%
2.5% 2.4%
1.6%
-5%
-2%
1%
4%
7%
10%
13%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* 2019
Average growth of Colombia’s main trading partners¹ and exports growth
Observed
September/2018 Forecast
Current Forecast
Exports Growth YoY
Source: IMF. For Colombia: Banco de la República
17
• This more volatile external context finds the Colombian economy with some macroeconomic adjustment still remaining.
-6,4%
-3,4%
-3,6%
-7%
-5%
-3%
-1%
1%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018(forecasts)
Current Account (% of GDP)
Chile
Colombia
Mexico
Peru
▪IMF’s Estimates¹:▫Maximum Long Term Potential Growth: 4,1% (A)▫Minimum Long Term Potential Growth: 2,8% (C)
1/ Lanau, Rodriguez-Delgado, and Roldós. Potential Growth in Colombia - Selected Issues Paper, April 2017
2/ Assumes 2% per capita GDP growth, population growth of 1% and productivity growth of 0,3%. It refers to a long run estimate in the absence of structural reforms.
18
• And a negative output gap prevails.
▪ BanRep’s long term Estimate: 3,3%² (B)
Source: DANE. Methodology 2015. Seasonally adjusted series
2,6%
(A)
(C)(B)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III
2010 2011 2012 2013 2014 2015 2016 2017 2018
GDP Growth – Annual Percentage Change(seasonally adjusted)
• On the other hand, inflation and inflation expectations have converged to the 3% target.
Source: Banco de la República – Monthly Survey of Economic Expectations
19
3,50%3.26%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18
CPI Inflation and its Expectations
Average of 1-Year Ahead Expectations
Average of 2-Years Ahead Expectations
Headline Inflation
3.18%
17/0
1/20
19
20
Co
nte
nts
Long-term Trends in Colombia
Recent Developments in the Colombian Economy
Policy Responses and Challenges
Financial System
Dealing with Increased External Volatility
Source: Banco de la República.
21
• Monetary policy has remained moderately expansionary…
… as inflation has converged to target and a negative output gap remains.
4,50%
7,75%
4,25%
0%
2%
4%
6%
8%
10%
12%
Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18
Policy Rate
Source: Banco de la República.
¹ The range of estimates represents the averages obtained by applying different methodologies, disregarding the uncertainty related to any particular methodology by itself. The mean presented is calculated as the average of the average estimate produced by each methodology alone. The methodologies used are presented in Box 2 of the September 2018 Inflation Report.
-2%
-1%
0%
1%
2%
3%
4%
Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18
Real Interest Rate and Estimates for the Neutral Interest Rate¹
Range of Estimates
Average of the netural interest rate estimates
Real Interbank RateReal Interbank Interest Rate
Source: Departamento Administrativo Nacional de Estadísticas - DANE
22
• Growth is expected to increase in 2019…
• …this would lead to a gradual normalization of monetary policy.
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
0%
1%
2%
3%
4%
5%
6%
7%
II III IV I II III IV I II III IV I II III IV I II III IV I II III IV
2014 2015 2016 2017 2018 2019
GDP and Investment Growth
GDP
Investment (RHS)
Source: Superintendencia Financiera 23
• This outlook is nonetheless uncertain, due to the risks stemming from external volatility which could affect both growth and inflation expectations.
Period COP Depreciation
2014-2017 54%
2018 8.9%
2018-Q4 6.4%
2019-YTD -3.3%
$ 3.092,65
$ 2.705,64
$ 3.289,69
$ 2.500
$ 2.600
$ 2.700
$ 2.800
$ 2.900
$ 3.000
$ 3.100
$ 3.200
$ 3.300
$ 3.400
$ 3.500
Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19
Exchange Rate - USD/COP
Source: Ministry of Finance
• Additionally, fiscal policy is geared towards fulfilling the decreasing structural deficit targets set by the fiscal rule.
24
-4,1
-3,9
-2,8
-2,3 -2,3
-2,4
-3
-4
-3,6
-3,1
-2,4
-2,2
-1,8
-1,4-1,3 -1,2
-1,1 -1,1 -1,0
-2,3 -2,3
-2,3-2,2
-2,2
-1,9 -1,9-1,8
-1,7
-1,3
-1,0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Deficit Allowed by the Fiscal Rule (%GDP)
Government Balance
Structural Balance
Start of the Fiscal Rule
Set by the Fiscal Rule Committee
Set by the Government
25
• A tax reform was recently approved, maintaining the fiscal rule and with the objective of reducing taxes for firms and promoting investment, particularly in innovative sectors.
• To fulfill that objective the reform included changes for various agents:– Firms:
– Individuals:• The creation of new tax brackets.
• An increase in the tax rate for dividends to 15%.
– Non-resident investors:• A significant reduction of the tax rate for investments in government bonds by non-residents, from 14% to 5%.
¹Approximately USD 320 million.
• A reduction of the corporate tax rate from 33% in 2019, to 32% in 2022, 31% in 2021 and 30% in 2022.
• The creation of a special regime for small companies to simplify their taxation.
• Firms will now be allowed to deduct the VAT paid on capital goods from their income tax.
• Companies will be allowed to deduct 50% of the amount paid on industry and trade tax -“ICA” from their income tax.
• The creation of a special status for new investment of over COP 1,02 trillion¹ with a tax rate of 27%.
Source: Ministry of Finance – Medium Term Fiscal Framework
• Compliance with the fiscal rule in the future remains a challenge, despite the expecteddecreasing path for the Government Net Debt.
26
24,7 25,523 22,7 23,2 23,9 25,4
28 28,6
10,9 10,4
9,9 8,8 8,8 8,79
9,1 8,50,5 2,7
6,45,4 6
35,6 35,9
32,931,5 32,5
35,3
40,842,5 43,1
2009 2010 2011 2012 2013 2014 2015 2016 2017
Government's Net Debt (%GDP)
LocalCurrency
ForeignCurrency
Depreciation Effect since 2012
25%
27%
29%
31%
33%
35%
37%
39%
41%
43%
45%
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Government’s Net Debt Forecasts
Central Forecast
GDP +1%
GDP -1%
Source: Ministry of Finance – Medium Term Fiscal Framework
Source: Bloomberg. Calculations by Banco de la República. 27
B
BB
BBB
A
AA
ARG
TUR
MLY
BRAZAR
PER
COL
THL
MEX
CHLRUS
-50%
0%
50%
100%
150%
200%
250%
300%
-120% -100% -80% -60% -40% -20% 0% 20%
Ch
ange
in 5
-year C
DS
Change in Local Currency vs. USD
5-year CDS and depreciation in 2018
• An appropriate macro policy mix is essential to limit vulnerability in a more volatile world. So far, markets have acknowledged Colombia’s strong macroeconomic policy framework.
-120% -100% -80% -60% -40% -20% 0%
Czech Republic
Chile
Poland
Malaysia
Thailand
Mexico
Peru
Philippines
Colombia
India
Russia
Brazil
South Africa
Turkey
Argentina
Local currency against USD in 2018
CreditRating
FCL = IMF’s Flexible Credit Line. Source: IMF. Calculations by Banco de la República
28
• Other policy fronts are also considered to preserve the macro-financial strength.
0% 100% 200% 300% 400% 500% 600% 700%
Argentina
Turkey
Malaysia
South Africa
Chile
Poland
Mexico
Colombia (without FCL)
India
Colombia (with FCL)
Indonesia
Brazil
China
Philippines
Peru
Korea
International Reserves to Short-term Debt and Current Account Balance
• The country’s external liquidity position is strong, to maintain it in a more volatile external environment BanRep began a gradual international reserves accumulation program.
• Current reserve accumulation is undertaken by means of put options, to minimize the impact on the FX market.
Source: Banco de la República
29
0
50
100
150
200
250
300
350
400
$2.700
$2.800
$2.900
$3.000
$3.100
$3.200
$3.300
$3.400
Títu
lo
Exchange Rate and BR’s USD purchases
Amount exercised (RHS) Exchange Rate 20-Day Simple Moving Average
Start of the reserve accumulation program
17/0
1/20
19
30
Co
nte
nts
Long-term Trends in Colombia
Recent Developments in the Colombian Economy
Policy Responses and Challenges
Financial System
Dealing with Increased External Volatility
¹ 30-Day LCR is the ratio of high quality liquid assets to total net cash outflows over the next 30 calendar days.Source: Superintendencia Financiera de Colombia. Calculations by Banco de la República.
31
• The financial system remains liquid, profitable and well capitalized.• Convergence to the Basel III standard is underway.
302,7%
80%
120%
160%
200%
240%
280%
320%
360%
400%
Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18
30-Day Liquidity Coverage Ratio¹ (LCR)
Depository Institutions' LCR
Minimum Requirement
15,8%
16,6%
8%
10%
12%
14%
16%
18%
20%
Oct-12 Jun-13 Feb-14 Oct-14 Jun-15 Feb-16 Oct-16 Jun-17 Feb-18 Oct-18
Total Solvency Ratio (Tier II)
Banks
Total Depository Institutions
Minimum Requirement
• While currency mismatches remain low in both the real and financial sector.
32*FX Market intermediaries: Includes credit establishments and brokerage firms.
Source: Banco de la República.
-700
0
700
1.400
2.100
2.800
-5%
-2%
1%
4%
7%
10%
13%
16%
19%
22%
Jun-16 Dec-16 Jun-17 Dec-17 Jun-18
FX Proprietary Position (Assets minus liabilities in foreign currency) of the Financial Sector*
Proprietary Position (% Technical Capital)
Proprietary Position in Foreign Currency (RHS)
% o
f Te
chn
ical
Cap
ital
USD
Millio
n
Upper regulatory limit
Lower regulatory limit
32,4%
4,7%
2,4%
3,1%
1,5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2010 2011 2012 2013 2014 2015 2016 2017
Debt of the Corporate Private Sector by currency and hedge(% of GDP)
Non-exporters Debt (unhedged) Non-exporters Debt with FDI (unhedged)
Non-exporters Debt (hedged) Exporters Debt
Local Currency Debt
33
Thank you