Colombia - Economic Briefing December  2001

Economic Activity Declining but Credit Setting Improves

The external sector continues to drag down the economy, as low commodities prices and the global demand downturn, undermine key export industries.  A more moderate inflationary setting has enabled the Central Bank to lower interest rates and as a result credit conditions have improved.  As a result, private consumption is likely to experience a boost but its rebound will hardly be sufficient to provide for a strong recovery of the economy, as public spending will remain constrained by the government’s commitment to fiscal stringency.

Industrial output remains sluggish owing to weaker external sector

In September, industrial production rose by 0.1% over the same month last year, up from the 4.5% contraction observed in August.  The improvement was prompted by transport equipment materials production and petroleum derivatives output, which grew by 40.2% and 20.5% respectively year-on-year in September.  On the other hand, chemical and paper products output declined rapidly, down by 21.7% and 12.8% respectively over the same month last year. 

The weakening of the external sector as a result of the global and regional slowdown remains the key drag on industrial performance, while domestic demand remains relatively resilient. Panellists have again cut their forecast for industrial output this year. The government expects that the extension by the US Congress of the Andean Trade Preferences Act (ATPA) through 2006 will give the external sector a boost next year. This should benefit manufactures, particularly clothing, textiles and the shoe industry.  The government expects exports to receive an additional boost of US$ 1.5 billion a year.  As a result, employment is anticipated to rise by as much as 300,000 in the next four years.  Panellists expect industrial production to pick up again next year.

Consumption receives boost as credit eases but prospects remain subdued

Real retail sales in September rose by 3.8% year on year (excluding fuel and automobile sales), which was up from 2.5% in August.  The largest expansion was observed in office furniture and equipment sales, which rose 66.8% over the same month last year but also in books, newspaper and magazine sales (35.1%) as well as household goods sales (13.6%).  Retail businesses claim that consumer demand is receiving a boost from increased credit availability, as interest rates have continued to fall this year. 

On 7 December the benchmark DTF rate was 11.5%, down from 13.4% at the end of last year.  Central Bank data indicate that gross domestic credit to the private sector increased 0.5% in September, down slightly from the 0.6% expansion in August, which had been the first positive monthly increase since July 1999.  According to the survey of the National Retailers Federation (FENALCO), business confidence in the retail sector improved further in October.  The percentage of retailers who were optimistic that sales would improve in the next six months rose from 41% in September to 48% in October, while the percentage of pessimists dropped from 24% to 17%. 

Falling inflation and lower nominal interest rates are likely to push up private consumption further but it will remain relatively subdued this year, as unemployment is high at 16.8% (October 2001).  Consensus data confirms that consumption growth will be modest, down a 0.1 percentage point from last month.  The pick-up in economic activity next year and prospects for further credit easing are likely to give only a slight boost to consumption as public sector fiscal adjustment is likely to offset positive developments in private consumption.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Colombia.  For more details please click here.

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