Colombia's economy should continue to achieve steady growth without inflation in 2015 - in spite of the sharp fall in the oil price through 4Q14.
According to the International Monetary Fund (IMF), the oil and mining sector accounted for over half of Colombia's export revenues in 2013. Of all the challenges that policy-makers could face, slippage in the price of oil is the one that is the most problematic. A fall in the price of oil of even US$10/barrel can have a significant impact on exports and government revenues (see box entitled, ‘What could go wrong?’).
However, much of the shock has already been borne by the exchange rate. For almost all of the period from the beginning of 2013 to early September 2014, the Colombian peso traded between COP1,750/US$ and COP1,930/US$. Since then, the peso has declined precipitously, with the result that the exchange rate in mid-December was about COP2,400/US$ or so. The movement in the currency has more or less matched the movement in the price of oil.
Other factors are also underpinning financial and economic stability and should continue to do so. One factor is the two-year Flexible Credit Line (FCL) for the Colombian government approved by the IMF in mid-June. At prevailing exchange rates, the FCL was worth nearly US$6bn. This is in the context of a US$400bn economy and government spending of around US$116bn in 2014.
Another factor is the enshrinement of the concept of fiscal stability in the constitution and the legal system. As the box entitled ‘Fiscal discipline - a central tenet of the policy mix’ - explains, the government has announced a number of measures to fund the COP12.5trn gap between revenue and spending in the latest budget. As Chart 1 shows, the IMF is looking for the government to run a primary surplus over the coming five years. The deficit should consistently be less than 1% of GDP. At a time when the economy appears likely to grow at an annual rate of about 4%-5%, with inflation of 2%-3%, the ratio of government debt to GDP should fall over time. In any case, at about 34% the ratio is not high. Meanwhile, at US$16bn or so, the current account deficit is of a scale that it can fairly easily be funded by inwards foreign direct investment (FDI).
| Chart 1: Colombia's economy - as the IMF sees it* |
|
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
| GDP, constant prices (% change) |
4.05 |
4.68 |
4.81 |
4.53 |
4.52 |
4.53 |
4.50 |
4.50 |
| GDP, current prices (US$bn) |
369.79 |
378.42 |
400.12 |
427.14 |
453.63 |
482.18 |
512.73 |
546.9 |
| GDP per capita, current prices (US$) |
7,938 |
8,031 |
8,394 |
8,859 |
9,300 |
9,773 |
10,273 |
10,832 |
|
|
|
|
|
|
|
|
|
| Current account balance (US$bn) |
-11.59 |
-12.41 |
-15.41 |
-16.15 |
-16.19 |
-16.79 |
-17.48 |
-18.68 |
| Current account balance (% GDP) |
-3.13 |
-3.28 |
-3.85 |
-3.78 |
-3.57 |
-3.48 |
-3.41 |
-3.42 |
| Total investment (% GDP) |
23.96 |
24.64 |
24.98 |
25.03 |
25.25 |
25.62 |
25.82 |
26.05 |
| Gross national savings (% GDP) |
20.82 |
21.36 |
21.13 |
21.25 |
21.68 |
22.14 |
22.41 |
22.64 |
|
|
|
|
|
|
|
|
|
| Inflation, end of period consumer prices (% change) |
2.44 |
1.93 |
3.35 |
3.04 |
3.04 |
3.04 |
3.04 |
3.04 |
|
|
|
|
|
|
|
|
|
| Volume of imports of goods and services (% change) |
8.95 |
4.55 |
6.54 |
6.34 |
4.91 |
4.96 |
4.19 |
4.48 |
| Volume of exports of goods and services (% change) |
4.11 |
3.46 |
3.24 |
7.18 |
6.29 |
6.77 |
5.51 |
5.01 |
|
|
|
|
|
|
|
|
|
| Unemployment rate (%) |
10.38 |
9.65 |
9.30 |
9.00 |
9.00 |
9.00 |
9.00 |
9.00 |
| Population mn. |
46.58 |
47.12 |
47.67 |
48.22 |
48.78 |
49.34 |
49.91 |
50.49 |
|
|
|
|
|
|
|
|
|
| Gen. Gov't. revenue (% GDP) |
28.34 |
28.26 |
28.12 |
28.20 |
28.26 |
28.47 |
28.37 |
28.27 |
| Gen. Gov't. total expenditure (% GDP) |
28.26 |
29.21 |
29.58 |
29.54 |
29.20 |
29.41 |
29.25 |
29.20 |
| Gen. Gov't. net lending/borrowing(% GDP) |
0.08 |
-0.95 |
-1.45 |
-1.34 |
-0.94 |
-0.94 |
-0.88 |
-0.93 |
| Gen. Gov't. primary net lending/borrowing(% GDP) |
1.56 |
1.17 |
0.85 |
0.91 |
1.31 |
1.26 |
1.26 |
1.15 |
| Gen. Gov't. net debt (% GDP) |
22.82 |
24.92 |
23.93 |
23.75 |
22.93 |
22.06 |
21.23 |
20.30 |
| Gen. Gov't. gross debt (% GDP) |
32.02 |
35.75 |
34.00 |
33.14 |
31.65 |
30.16 |
28.76 |
27.27 |
|
|
|
|
|
|
|
|
|
| Source: IMF |
| *Forecasts begin in 2014 |
The resilience of the Colombian economy is reflected in the minutes of the latest (28 November) meeting of the central bank (Banrep’s) board of directors. The board kept the key policy rate unchanged at 4.5%. It noted that the fall in the peso on foreign exchange markets had not had a significant impact on actual inflation (3.29% in the year to October) or expected inflation (close to BanRep’s 2%-4% target over two, three and five years).
BanRep expects that GDP growth of 4.5%-5.5% for 2014 as a whole, with 5.0% the most likely outcome. BanRep is, therefore, slightly more optimistic than the IMF. At its meeting, the Board noted that growth would be underpinned by domestic demand. “This is suggested by the behaviour of retail sales, consumption credit, consumer confidence index, and that of the labour market, which indicate that consumption would maintain a strong momentum. The increase in the external purchases of machinery and transportation equipment, and the trend registered by civil works, anticipate a good performance of investment, although at lower rates than those observed for the first half of the year. Growth in consumption has been underpinned by an expansion in credit that is faster than the increase in nominal GDP. The banking sector is well capitalised, well regulated and has been expanding internationally (mainly into Central America).”
As the box entitled ‘Colombians are underbanked and unequal’ shows, the banking sector has a lot more work to do to reach poorer households, who are still largely living and working outside the formal economy. Financial inclusion can and should be a part of a reduction in inequality, in a country where one fifth of the population receives just 3% of the national income.
If reducing inequality is one challenge facing the government, perceptions of corruption are another. As chart 2 shows, research undertaken for the World Economic Forum’s latest (2014) Global Competitiveness Report found that corruption and inadequate infrastructure are the two most problematic factors for business in Colombia. The inefficiency of government bureaucracy was in third place. All three were seen as being significantly bigger challenges to doing business in the country than existing tax regulations, the level of tax rates and (perhaps surprisingly for a country that is home to a long-running insurgency) crime and theft.
Chart 2: The most problematic factors facing businesses in Colombia
Weighted % responses

Source: World Ecnomomic Forum, Golbal Competitiveness Report 2014-15
Overall, though, it is the strengths of Colombia’s economy that stand out. The adjustment in the currency and other factors have ensured that the economy has remained quite resilient in face of a fall (of about 45% so far) in the price of oil, the most important export. Despite the challenge of a sustained decline in oil prices, this augurs reasonably well for 2015.
Colombians are underbanked and unequal
- At the end of 2012, the stock of credit amounted to 37% of GDP, which was below the regional average.
- In 2011, only 15% of people in the bottom 40% income share had an account with a formal financial institution: some 45% of people in the top 60% income share had such an account.
- In 2010, only 41% of small companies (with fewer than 20 employees) had a bank loan or a credit line. For large firms, the corresponding figure was 72%.
- The Gini index improved marginally, from 58.7% in 2000 to 55.9% in 2010, when 20% of the population accounted for 3% of national income.
Sources: World Bank Global Financial Inclusion Database, IMF.
The commitment to fiscal discipline
- Fiscal discipline is a central tenet of the government's policy mix. As a part of the Fiscal Transparency and Responsibility Law (#819 of 2003), the government is required to present the Medium Term Fiscal Framework (MTFF) to congress each year. In particular, the government has to confirm that it has met the fiscal targets set out in the previous year's MTFF: in the event of non-compliance, it is required to explain the deviation and what corrective measures will be applied.
- In June 2011, Colombia's congress approved a fiscal rule which requires the structural deficit (i.e. allowing for oil-related revenues and the output gap) to be below 2.3% of GDP from 2014, below 1.9% in 2018 and below 1.0% from 2022. If output growth is two percentage points (or more) lower than potential, the government can pursue an expansionary fiscal policy. Moreover, the rule can be suspended in the event that extraordinary events threaten Colombia's macro-economic stability.
- In 2011-12, the government outlined a strategy which tilts the composition of its debt in favour of local currency securities. In mid-September 2014, congress passed the National General Budget, in which spending exceeded revenue by COP12.5tn (roughly US$6.25bn at the prevailing exchange rate). As required by the law, the government then identified ways in which the deficit would be funded. It has announced five measures. One is the extension of the Gravamen a los Movimientos Financieros (GMF- the financial transactions tax) at the current rate of 0.4% for another four years. The GMF rate will decrease progressively by 0.1% each year from 2019 to 2021, after which it will remain at 0.1%. Second, the government has changed the rates of the wealth tax, and the bases on which they are levied. Third, the CREE - the corporate equality/ fairness tax, has been increased for companies with profits of over COP1bn. The overall CREE rate will be increased by 1 percentage point from 2016. Fourth, the Value Added Tax (VAT) rebate (of 2 percentage points) for payments made by credit card and mobile banking (which had been introduced to encourage people into the formal banking system will be ended. Finally, the government is looking to remove a lot of corporate tax breaks, which have resulted in an overly complicated system.
What could go wrong?
In May 2014, the IMF looked at Colombia's vulnerability to external shocks in a Selected Issues Paper (Country Report No. 14/167). The biggest challenge identified was a fall in the price of oil, which accounted for over half of total exports in 2013. Of all government revenues, about 16% of the total are oil-related: these oil-related revenues amount to around 4.5% of GDP. The IMF also noted that lower oil prices could reduce FDI inflows, given the focus of foreign investors on the Colombian energy sector. The IMF assessed that a US$10 fall in the price of oil could reduce exports by US$3.3bn or so (0.9% of GDP) and fiscal revenue by around 0.4% of GDP.
The IMF also considered that a negative growth shock in major trading partners - the US, the European Union, China and a group of countries in Central and South America - would curtail exports. Such a shock - or any event that resulted in an increase in global risk aversion - could affect Colombia directly by reducing the access of its banks to global capital market. Alternatively, the shock could affect the country indirectly, by bringing about a fall in the oil price.
Interestingly, the IMF assessed that the impact of a growth shock (i.e. growth in GDP in 2014 being 1% lower than projected) in Colombia's Latin American trade partners (other than Venezuela) would be greater than that of a similar shock in the US, the European Union or China. This was because of the growing trade links between Colombia and the other countries (particularly in manufacturing), the 'close association' of the various countries' economic cycles and the vulnerability of the other countries to similar shocks.
The IMF noted that Colombia is exposed to shocks in Central America for another reason. As at the end of 2013, the three largest banks (Bancolombia, Banco de Bogotá and Davivienda) had invested US$44.4bn through their subsidiaries in the region. The largest single apparent exposures were Panama (US$24.5bn), El Salvador (US$7.6bn), Costa Rica (US$5.4bn), Honduras (US$3.6bn), the British Virgin Islands (US$3.0bn) and Guatemala (US$2.2bn). In practice, the Panamanian subsidiaries operate across the region, which means that the effective exposure to Panama is lower, and to the other countries is higher, than these figures would indicate on their own. The banks' collective exposure to Central America amounted to 82.1% of their foreign investments and 22.0% of the total assets of Colombia's banking system. The IMF observed that 'exposure to shocks in Central America is mitigated by the strength of the balance sheets and soundness indicators of the subsidiaries in the region, which for the most part boast adequate capitalisation and robust profitability.'
The IMF was also fairly sanguine about the impact of rising interest rates in the US. The IMF assessed that any increase in the yield on US Treasury bonds would be matched by a similar rise in the yield of Colombian government bonds. However, such an increase would likely be accompanied by ongoing robust (or increasing) growth in the US economy, which would boost Colombian exports.
On 24 June, 2013, the IMF’s Executive Board approved a two-year Flexible Credit Line (FCL) arrangement for the government of Colombia. The FCL was for the equivalent of SDR3.87bn (or US$5.96bn at that time). The IMF applauded the policy framework and the general resilience of Colombia's economy. The IMF also noted that the FCL arrangement would enable the government to maintain orderly financial market conditions, through providing a buffer against tail risks.