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Currency strengthens as regional
concerns ease
The regionally induced currency deterioration observed in recent months,
reversed in October, as the peso appreciated for the first time since
March. In October, the currency appreciated 2.0% in nominal terms against
the US$ over the previous month to close at 2,773 pesos to the US$ at the
end of the month. However, the strengthening was not sufficient to reverse
the strong deterioration experienced throughout the preceding six month
period. As a result, the peso is now 17.4% weaker in nominal terms than at
the beginning of the year. As negotiations with the IMF progress and
regional contagion fears subside, Colombian risk perceptions have
improved, which is not only being reflected in the currency but also in
debt spreads. Colombia’s key sovereign risk indicator, the J.P. Morgan
EMBI+ bond spread to comparable US Treasuries, narrowed by 202 basis
points in October to close at 865 basis points. Owing to the improvement
for Colombian assets in capital and foreign exchange markets, some
Consensus Forecast participants anticipate that the peso will recover lost
ground by the end of the year, appreciating an additional 2.4% to reach
1,708 pesos to the US$. The weaker currency is likely to have some
downside effects on domestic demand. Exports however – which had been
suffering from a loss of competitiveness amid devaluations in other
regional economies earlier this year - are likely benefit. The annual
depreciation rate next year is anticipated to slow significantly to 4.7%,
which would be down from the 15.4% observed this year. As a result, the
currency should close the year at 2.842 pesos to the US$ by the end of
2003.
Economic activity picks up amid
higher consumer demand but sustainability in doubt
Recent economic indicators point to a pick up in domestic economic
activity. According to DANE, real national retail sales rose 7.3% in
August over the same month last year, which was up from the 3.2% increase
registered in July. Strong vehicle sales as well as healthy electrical
appliance and furniture sales and a pick up in household item sales were
the key drivers behind the robust August reading. Meanwhile, the most
recent September retail survey of the National Retailers Federation (FENALCO)
suggests that consumption has slowed in September. Of the total businesses
surveyed, 69.0% claimed that retail sales rose or remained virtually
unchanged, which is down from the 71% reported for August.
Export sector dampens industrial
output growth
Meanwhile, industrial production slowed in August with growth decelerating
from an annual 2.7% growth in July to 1.0% in August. Even though the
credit setting has improved and the currency weakening has provide the
export sectors with increased competitiveness, the declining demand in key
export markets, particularly the United States and Venezuela has offset
any benefits so far.
Participants expect economic activity to have slowed in the third quarter
to 1.7% from the 2.2% in the second. Moreover, growth is anticipated to
decelerate further in the final quarter, which will draw down the annual
growth rate to 1.5%. But growth should already pick up in the first
quarter of next year, as exports rebound and domestic economic activity
begins to recover. As a result of a more favourable setting next year,
economic growth is anticipated to accelerate.
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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