Andean Group - September 2009 (ISSN 1741-4466)

Local economists are still not entirely sure what effect Venezuela's ban on imports from Colombia will have on the Colombian economy. Colombian export revenues have already been diminished by the slowdown in the US economy, the country's biggest single export market. Venezuela was Colombia's next biggest export market.

Colombia's industrial production slumped 6.5% year-on-year in July. Local economists argued that the data pointed to an improvement: in the first quarter of 2009, industrial output fell 7.5% (though the overall economy contracted by only 0.6%). In the worst month to date this year, April, it was down 14.5% year-on-year.

The July 2009 slowdown was led by the steel industry, where output crashed 31% year-on-year. The textile industry also saw a 24% year-on-year drop in production. To be fair, 16 industrial sectors did register growth, led by the sugar sector, which rose 12% year-on-year.

The worry for policymakers is that the overall decline in output will prompt companies to lay off more staff. In July, industrial employment, excluding the coffee industry, was down 6.3% over July 2008. The biggest impact was on contracted workers.

Industrial sales were down by slightly more than output in July (falling 6.8% year-on-year), which suggests that companies are still not prepared to rebuild inventories. Steel sales fell 21% year-on-year, while sales of basic chemicals fell 14%, and paper and packaging 15%.

Overall, for the first seven months of 2009, industrial output contracted 8.2% year-on-year. Car production in the first seven months slumped 42% year-on-year. A lot of Colombian-built cars were exported, legally and illegally to Venezuela in 2008.

Although the July output figures are the latest, they do not show the effect of Venezuela's decision to block purchases of Colombian cars, food and other goods. In 2008, Colombia exported more than US$6bn in products to Venezuela, equal to about 3% of its GDP. Venezuela sells few products to Colombia.

The influential economic consultancy, Fedesarrollo, underlined how bleak the outlook for the economy had become by being one of only two of 42 economic forecasters to suggest that the Banco Central de Colombia would begin cutting interest rates again at its 25 September monetary policy meeting. Fedesarrollo forecast that the central bank would cut rates by 50 basis points to 4%. The bank has held interest rates at 4.5% since July. Prior to that, it had cut rates at seven consecutive meetings. It reduced rates by 550 basis points between December 2008 and June 2009. Arguably, the Colombian authorities were slow to react to the global economic slowdown. The local consensus forecast (of 42 economists) is now for real GDP growth of just 0.16% year-on-year in 2009. Some fear that the economy could actually contract. In 2008, real GDP growth was 2.8% year-on-year.

Inflation: In August consumer prices rose by 0.4% month-on-month, bringing the accumulated rate for the first eight months to 2.2% and the annual rate to 3.13%. In 2008, the annual inflation rate was 7.7%.

Investment: Gas Natural from Spain is talking to Colombiana de Inversiones about acquiring Empresa de Energí­a del Pací­fico (Epsa), the main electricity supplier in the west of the country. The government is also trying to privatise the country's third biggest generating company, Isagen, for US$1.5bn.